As inflation pinches people, comes the desire for more income tax breaks.
To begin with, people want the government to increase the basic income tax exemption limit. The current exemption limit is ₹2. 5 lakh, which many feel is not enough. Considering those with incomes of up to ₹5 lakh get a tax rebate under section 87A, it makes more sense to increase the exemption limit up to ₹5 lakh, thus simplifying the first step in calculating income tax.
Despite the lower applicability of the tax rate in the new tax regime, assessees prefer the previous version due to the exemptions included in it.
Dev Ashish, Founder, stable investor, says: “The new tax regime without exemptions needs to be revised to make it more attractive and increase adoption. In the absence of any exemption, the deal can only be sweetened by further reducing the tax rates and reworking the plates (and reduce it from the current six to 3-4 at most). To further reduce complexity and confusion, there is an urgent need to have a single tax regime and provide stability to the personal tax architecture in India.
Added benefits under Section 80C
Before every budget session, experts have stressed the need to increase the exemption limit under Section 80C of the Income Tax Act.
Rajani Tandale, Head of Product – Mutual Fund, 1finance.co.in, says, “It has been almost eight years in 2014-15 when the lower limit was raised to 80C and since then people’s wages and expenses have increased, but the tax saving option limit has not increased. The enhanced limit not only eases the burden of the average taxpayer, it also promotes greater family savings and keeps inflation under control.
Increasing the exemption limit could be a good start to giving salaried taxpayers much-needed relief from the ever-increasing tax burden. More tax exemption limits under Section 80C will also make many assessees increase their investments, which will not give them moderately good returns in the future, but will also help them save more on taxes.
However, some financial experts believe that despite repeated requests from taxpayers, the government will not raise the exemption limit. Viral Bhatt, Founder, money mantra, says: “The government’s priority has been different in the last two years as it tries to balance the impact of the pandemic and the growth prospects of the economy. So many mutual fund participants admit that the government will not have the bandwidth to meet the micro-level demands. So the budget may try to put more money into taxpayers through a rate cut. So don’t get your hopes up.”
“It will be difficult for the government to make different exemptions for individual taxpayers. The government should look at increasing the exemption limit from the current ₹1.5 lakhs to approx ₹2 lakhs minimum considering that this will provide relief to the entire middle class. Alternatively, the government may also consider increasing the basic tax exemption to approx ₹5 lakhs. Basically, the idea is to relieve the middle class of the tax burden,” said Aditya Shah, founder of JST Investments.
Remember those days when income from long term capital gains (LTCG) and dividends were not taxed? Although investors would like the government to abolish LTCG tax, the same seems far-fetched. The government had said last year that it had no plans to abolish capital gains tax in the long term.
Helping those with mortgage loans
Borrowing has become more expensive in the past year due to rising interest rates. People either have to pay higher EMIs or opt for increased loan tenure which in turn forces them to pay more interest in the long run. The total payment is therefore much more than estimated when applying for the loan.
“The interest rates on home loans have gone up, putting pressure on the home buyer. For existing owners, the loan tenure increases, for new buyers, EMIs go up. Currently, ₹1.5 lakhs of principal is allowed as deduction under Section 80C. If this is removed from Section 80C and a separate tax deduction is allowed for repayment of home loan principal in addition to Section 80C, it would be a relief to home buyers. Income after tax will increase due to additional deduction and this would be a welcome change,” says Pratibha Girish, Founder, Finwise Personal Finance Solutions.
Sell mutual funds after one year and the government imposes an LTCG tax on the previous earnings ₹1 lakh at 10 per cent. Another change sought from the government is to redefine the “retention period” or increase the retention period for a period longer than a year.
Bhatt added, “In case of unlisted equity funds, debt funds and debt-oriented balanced funds if the holding period is more than three years or 36 months, they are classified as long-term equity assets. If the period is less to three years, it’s considered short-term capital goods. So, in my view, the finance minister should do the same with unlisted shares and debt funds.”
Allow for rampant change
Switching from regular to direct mutual fund plans should not be considered a sale transaction and therefore should not be considered for taxes or exit charges. The definition of sale-purchase should also exclude intra-scheme change from growth plans to dividends (IDCW) or vice versa.
Do you remember the famous slogan “tension gayaa pension lene”? However, seniors lament that their pension income is also a source of strain given that the government has imposed a tax on it. Although the pension is under the ambit of taxable income, what has been ignored is that policyholders are already paying their pension policy premiums from taxable income.
As part of his Budget 2023 wish list, Vighnesh Shahane, CEO and MD, Ageas federal life insurance says, “To increase pension penetration and make India a pension society, especially since we do not have any social security cover, our request is that pensions should be tax-free in the hands of the customer because the pension premium is already paid through taxable income”.
Shahane also added, “Currently Section 80C of the Income Tax Act is crowded with many investment options for tax benefits, and there should be a separate bucket for life insurance policies or the limit should be increased from ₹1.5 lakh for ₹2.5 thousand At least a separate section for term life insurance policies would be useful given the huge protection gap in the country.”
Wishing for more deductions or lower taxation may not be enough. Some financial experts dismiss it as nothing more than wishful thinking. The idea should be to increase the tax base rather than simply reduce the tax net. “My guiding principle is that deductions are a very bad way to deal with tax incidences – they create all sorts of perverse incentives,” says Gaurav Rastogi, founder. Kuvera.in.
A country’s infrastructure depends a lot on how much people are willing to spend in taxes. The ITRs submitted highlight the responsibility we have towards this country. Adding more people to the tax base will also allow them to take responsibility and share in the growth of this country.
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First published: December 14, 2022, 8:06 am IST