Pre-Budget Expectations – Personal Tax
As always, the commentary on the forthcoming Union Budget 2018 is rife with the “common man’s expectations”. However, the government may not be able to meet all the expectations on the personal tax front due to fiscal constraints. While the FM may wish to focus on development and welfare related measures, the common man may still reasonably expect the following:
Basic exemption limit from INR 2.5 lakh to 3 Lakh: While many low income earning individuals may hope for an increase in the existing basic exemption limit from Rs 2.5 Lakh to Rs 3 Lakh resulting in a tax saving of Rs 2,500, this may not help the government in its aim to widen the tax base. Instead, the FM may consider an increase to the section 87A relief threshold to Rs 5 Lakh and increase the rebate to Rs 5,000. This shall reduce tax liability for the low income earning individuals.
Increase in 80C limit: While the deduction under Section 80C provides for various types of payments by the taxpayer including annual expenses (e.g. children tuition), investment and housing (e.g. housing loan repayment) and retirement fund contributions (e.g. PPF), the overall limit of Rs 1.5 lakh (excluding NPS contribution) is very low. This Budget the government may consider increasing the 80C limit from Rs 1.5 Lakh at least to Rs 2 Lakh specifically for certain types of assets (e.g. housing loan repayment) or for retirement fund (e.g. NPS contributions) which are recognised by the government as focus areas. This shall help the individual to additionally save tax of Rs 2,500 to Rs 15,000, depending upon the applicable tax slabs.
Increase in medical reimbursement limit: While the government has increased the limits for deduction towards health insurance premium over the last few years, many outpatient expenses are not covered by such insurance. Given that such medical costs have increased substantially, the FM should consider an increase in medical reimbursement limit of INR 15,000 provided to the employees by the employer on the same lines as has been done for health insurance premium, say, Rs 30,000 at the minimum.
Parity in taxing National Pension Scheme (NPS): In the past, the FM has brought in the partial tax exemption for NPS but this product has failed to catch the fancy of retail investors. Currently, upto only 60% can be withdrawn at maturity and balance needs to be annuitized as pension. At the time of maturity only 40% of the maturity amount is tax exempt and balance lump sum withdrawn of upto 20% is fully taxable. The FM in order to make this product further appealing, may consider to increase the tax exemption limit for the entire lumpsum withdrawal (i.e. upto 60%) at the time of maturity.
Deduction for investment in long-term infrastructure bonds: In the past, an individual could invest in tax saving infrastructure bonds and have the sense of contributing to the country’s infrastructure development and at the same time save on tax, based on the deduction which was available of upto Rs 20,000. This tax benefit was withdrawn a few years ago. In the wake of the growing need to further strengthen country’s infrastructure, the government may consider reintroducing this deduction of say, upto Rs 50,000.
Rationalisation of “holding period” in case of residential property for the purpose of long-term capital gains: There are many home buyers who invest in under construction property. The property developer takes 4 to 5 years or sometimes more than that, to give possession of the property to the buyer. During this period the buyer would have paid the advance booking amount and the balance consideration as demanded by the developer depending on the stages of construction. There has been a long debate on if such property (after completion of construction) is sold by the buyer what would be its holding period to determine whether it is long term or short term capital asset. Will the holding period of such property start from initial agreement date, allotment date, registration date, possession date or from final payment date? While there are a number of judgements in relation to the capital gains exemption under Section 54, suitable clarification needs to be introduced by the government to clear the air in this regard.
Deduction of interest on home loan during the construction period: Currently, an individual can claim interest on housing loan paid during the pre-construction period as tax deduction in 5 equal annual instalments starting from the year in which the property is constructed. Such interest paid during the construction period is usually on a higher side. Given that for a self-occupied property the interest that can be claimed during the year is limited to only Rs 2 Lacs from the year such property is ready, most individuals lose out on claiming the entire interest that is paid during the construction period. The government during this Budget may consider allowing such interest as deduction in the year(s) when the interest is paid during construction of property or may as well provide additional deduction for such interest post construction of property (i.e. without restricting such deduction to the annual limit of 2 Lacs).
Taxability of stock options provided by employers in the hands of Non-residents (NR) or Not Ordinary Residents (NOR): Stock option plans are taxed as a “perquisite” in the employee’s hands at the time of allotment/ transfer of shares by the employer. However, there is no clarity on taxability if the employee qualifies as NR or NOR at the time of allotment of shares and the stock option gain pertains to services rendered outside India during the period between grant of the option and vesting. This matter has gone unnoticed for a long time and the FM should introduce a clarification in this regard to avoid unnecessary hardshipcaused to internationally mobile employees who may face litigation with Income tax authorities.
As the current government has been introducing significant structural changes in the tax filing process such as e-assessments, early issue of tax refunds, and reporting Aadhaar number in the tax return, this Budget may also contain further measures to simplify tax compliance and tax administration.
