Budget 2016: 5 income tax expectations from Arun Jaitley

Five things the common man would like to see in the Union Budget 2016

Budget 2016 countdown has begun and all eyes are yet again on Finance Minister Arun Jaitley with many more expectations. One of the major announcements to lookout for will be a possible revision of the tax slabs whereby tax exemption limits will be raised from Rs 2.5 lakhs currently to Rs 3 lakhs. The Economic Survey 2016 released on Friday has already suggested that tax exemption thresholds should not be raised but more measures should be taken to widen the tax net and end subsidies for the well-off.

Below is the list of 5 expectations from the common man. 

Read our full coverage on Union Budget 2016

1) Interest on housing loan:

 

Currently, the deduction of interest on a self-occupied house is capped at Rs. 200,000. 

Further, if the construction of the house is completed after 3 years then the deduction is restricted to just Rs. 30,000. This 3 year period is calculated from the end of the year in which the loan was taken. The deduction is allowed only from the year in which the buyer obtains the possession of the house.

Lately there have been significant delays, often well beyond the 3 year period, in completion of housing projects. These delays have caused significant hardships to the property buyers.

In order to provide them some relief, the government may consider allowing interest deduction in such cases without the cap of Rs. 30,000, and from the year in which the possession was due to the buyer as per the terms of the agreement.

2) Rationalize HRA exemption:

HRA exemption is calculated as the amount which is least of rent paid minus 10% of basic salary, actual rent paid and 50% of basic salary if you stay in a metro city or 40% if you stay in any other city. Currently metro cities include Delhi, Mumbai, Chennai and Kolkata. 

Considering the current scenario of many cities like Hyderabad, Bengaluru, Gurgaon and Pune where rents have skyrocketed in the past decade, the rule of 50% of rent can be extended to these cities as well. These cities attract a lot of qualified individuals from across India who stay in rented accommodations and lose out on the tax benefit in spite of paying a high rent. 

3) National Pension Scheme or NPS:

The tax laws provide for a deduction on contribution to the National Pension Scheme. NPS is unique in a sense that the investor has discretion over the type of investments (debt, equity or hybrid).

However, the NPS is structured as an Exempt Exempt Tax (EET) scheme meaning that while deductions (or exemptions) are provided at the time of making the investment and when returns are earned on the investment, there is taxation when the corpus is encashed. This element of taxation makes this scheme less attractive, especially compared with public provident fund or employees’ provident fund schemes which allows for tax free withdrawals.

Therefore, for a wider participation in NPS, the scheme should be made exempt.

4) Widen tax base: 

In a country of over 120 crore people, there are only about 4 crore taxpayers. Theoretically, the narrow base of tax payers results in higher rate of income tax on the compliant taxpayers who develop a sense of unfairness.

While widening of tax base has been an important objective for the government, and the government indeed has taken certain steps in the direction, some more concrete measures would only help in bringing more people under the tax net and help evenly distribute the tax burden. 

Some measures could be in the form of more awareness campaigns how taxes help in nation building, providing some form of social recognition to the taxpayers, and maybe even routing some social benefits through the tax filing mechanism like what US has done.

5) Standard deduction for foreign salary and credit of state and municipal income taxes paid: 

If an individual takes up employment outside of India and is a resident in India for that year then he has to report his foreign salary in the Indian tax return and pay income tax thereon in India. The tax laws do allow credit of foreign income tax paid on such salary.

The employees, despite spending significant amount on rent, do not get any deduction for HRA as HRA is often not a part of the salary component. They can claim deduction of rent only under section 80G which is restricted to a small amount of Rs. 2,000 per month. Plus his overall living expenses are also increased. Therefore, to reduce the burden of taxation for such employees, the government can consider an ad-hoc deduction of say 30% of the foreign gross salary. 

Further, sometimes such employees have to pay state or municipal income tax in addition to the federal (or Union/National) income tax. The government should explicitly allow credit of such income taxes too to avoid onerous double taxation.

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Vaibhav Sankla is  Director, H&R Block India Pvt Ltd