Just a day to go before the Union Budget 2017-18 is presented by Finance Minister, Mr Arun Jaitley, and as usual, everyone is on tenterhooks. This budget will go down in history, because it is different in many ways. This is the first budget to be advanced by a month, the first budget to include the railway budget and the first to be a paperless budget.
However, apart from these historical changes, the budget may include a host of policy changes that may surprise both individuals and corporates.
There is an uncanny feeling that this budget may introduce tax on long-term capital gains for equity investments. This will certainly not go down well with investors, specifically retail investors, who are once again beginning to flock the capital markets through mutual funds.
Then on the positive side, due to the increase in tax collections, many are expecting changes in the tax slabs with an increase in the basic exemption limit. To soothe demonetisation woes, the Government may set a populist budget with an emphasis on agriculture. Not only because the rural segment was the worst hit by the note ban, but to attract voters before the upcoming state elections as well, specifically in Uttar Pradesh (UP) and Punjab.
Many experts and commentators will have varied opinions of the changes the budget should or should not include. Putting speculation aside, PersonalFN puts together a budget wish list of the common man. The enhancement in the limits of many exemptions have been long awaited, but not yet considered.
Increase the income tax exemption limit
Every tax-paying individual will cheer an increase in the basic exemption limit, which is currently at Rs 2.50 lakh. This limit was last revised in FY 2014-15 and needs to be revisited, given the higher tax collections and increased cost of living. Increasing this limit by Rs 50,000 to Rs 3 lakh will lower the burden of tax payers, which will lead to higher consumer spending.
Increase Section 80C Limit
Most individuals in the 30-40 age group service a home loan. The home loan principal itself accounts for a large portion under Section 80C. This leaves little space for tax-saving investments. The Rs 1.50 lakh rebate under Section 80C is insufficient for most individuals, and most end up utilising the entire deduction available. The investment exemptions under Section 80C create a heathy saving habit amongst individuals. To boost investments and exemptions on specified expenditure like home loans or tuition fees, etc., the Government may think of revisiting this limit to Rs 2 lakh.
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Uniform norms for Section 80C investments
Under Section 80C, if you invest in a Unit Linked Insurance Plan (ULIP), the lock-in period is 5 years. However, in a similar market-linked product like Equity Linked Savings Schemes (ELSS) the lock-in period is 3 years. Most tax-saving fixed deposits of banks, post office or companies such as HUDCO have a lock-in period of 5 years. Liquidity is a concern for most savers, hence, the time limit for all such investments should be reduced from 5 years to 3 years.
Reintroduce Infrastructure Bonds
The Finance Act, 2010, had introduced Section 80CCF to encourage inflows into the infrastructure sector. This Section was extended further vide the Finance Act, 2011 for financial year 2011-12. But later, there was no clause for extension. A deduction of up to Rs 20,000 was available under this Section. It is expected that the Government may once again reinstate this Section in the Union Budget 2017-18, and this time possibly with a higher deduction limit of upto Rs 50,000.
Tax Parity in Treatment of NPS
The National Pension System (NPS) comes with an E-E-T (Exempt-Exempt-Tax) status. Meaning, tax is exempt only at the time of investment and accretion, but not at the time of withdrawal. However, the Employee Provident Fund (EPF) and the Public Provident Fund (PPF) enjoy an E-E-E status, where the tax is exempt at all stages. NPS has not taken off as expected in the corporate sector mainly due to this. To bring parity with other pension products, withdrawals from NPS should be fully exempted.
Children Education Allowance
Fixed in 1998-99, the monthly exemption for children’s education is Rs 100 per month for up to two children. The cost of education has soared over the past 19 years. The inflation rate of education expenses could be anywhere between 12%-15% in urban and semi-urban areas. Based on this, the exemption should be raised to at least Rs 1,500 per month, if not more.
Hostel Expenditure Allowance
Hostel Expenditure Allowance was doubled in 1997 to Rs 300 per month from Rs 150 per month. With more number of students exploring education opportunities beyond their hometown and the increased cost of living, there is a need to raise this exemption limit as well. Based on an inflation rate of 9%, the current costs work out to over Rs 1,500 per month. This too, would be insufficient to cover even the room rent. The exemption limit can be raised to at least in the range of Rs 3,000 to 5,000 per month to cover the basic costs.
Transport Allowance
In the Union Budget 2016-17, transport allowance was raised to Rs 1,600 per month from Rs 800 per month. This limit was raised after more than a decade. For those living in urban areas, travelling costs would be in excess of Rs 3,000 per month. The finance minister should consider raising the exemption limit to at least Rs 3,000 per month.
House Rent Allowance (HRA)
The maximum amount that can claimed as an exemption under HRA is the least of –
- Actual HRA; or
- Rent paid in excess of 10% of basic salary + Dearness Allowance (DA) if in terms of service; or
- 50% of basic salary + DA in case of Chennai, Delhi, Kolkata, Mumbai (40% of salary + DA in case of other cities)
A report from Deloitte highlights that cities like Hyderabad, Bangalore, Gurgaon, Pune, though not metro cities, now have accommodations with skyrocketing rents. Therefore, the finance ministry should consider extending the rule of 50% of basic salary to other cities as well.
Meal Allowance
Food in office premises or through non-transferable paid vouchers usable only at eating joints provided by an employer is not taxable, if cost to the employer is Rs 50 (or less) per meal or about Rs2,500 per month. This limit was set in 2001. Based on an inflation rate of 7.38% (food inflation over the past 16 years), the current cost works out to about Rs 156 per meal. The Government should consider increasing the meal allowance to at least Rs 150.
Medical Reimbursement
In the 1998-99 budget, the deduction towards medical expenses was revised to Rs 15,000 from Rs 10,000. Nearly two decades later, there has been no change in this exemption, while medical costs have soared. A simple calculation will reveal, that at an inflation rate of 9%, the present value of Rs 15,000 is nearly Rs 80,000. Such a steep exemption may be a bit too much to ask, but the limit should be raised to at least Rs 50,000 per month, much in line with what was proposed in the Direct Tax Code.
Bank Savings Account Interest
The Union budget 2012-13 introduced deduction under Section 80TTA for interest on savings bank accounts upto Rs 10,000. A reverse calculation will reveal that you will need to maintain an average bank balance of Rs 2.5 lakh. As most individuals leave their emergency corpus in a savings account, their savings interest may exceed Rs 10,000 in a year. Therefore, this limit should be increased to Rs 20,000.
Home Loan Interest
Home loan interest deduction of Rs 2 lakh per annum (under Section 24(b)) is an incentive for homebuyers to take a loan. But many do not know that if the possession of house is given after more than five years of taking the loan, you may lose 85% tax benefit. The permissible deduction falls from Rs 2 lakh to just Rs 30,000 a year, for no fault of yours. A delay in the delivery of real estate projects is a reality that can affect your tax benefits. Most high rise buildings may take 5-7 years to complete. This restriction on the completion of the project, should be scrapped. With the ever increasing cost of property prices, the exemption limit should be raised to Rs 5 lakh.
So, will the Union Budget 2017-18 provide some respite? Well, let’s wait and watch. On February 1st, we will get to know if Mr Jaitely fulfils these wishes of the common man. But we believe, the insensible exemptions and deductions currently levied need to be made more meaningful for the common man. Let’s hope for the best. J
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