Due to the brunt of demonetization on the common man and the hardships faced during the last few months, the government has hinted at raising the income tax slabs, thereby lowering the tax burden on taxpayers on account of higher revenue being collected on account of cashless systems.
This year budget would likely be announced on Feb 01, 2017 and we can hope that government could reduce the burden of tax on the common man by giving other income tax deductions.
ICAI and FICCI have sent their pre-memorandum Budget recommendations to the FM, in which it has been recommended that the government should consider raising the income tax exemption limit as shown in the table below:
In case the proposed slabs are introduced by the government, lets say a person having a taxable income of Rs.8 lakhs would have to pay tax of Rs. 50,000. We have explained this with an illustration below:
Under the current tax rates, he pays no tax on the first Rs.2.5 lakhs of his income(category I). Of the remaining Rs.5 lakhs, Rs.2.5 lakhs fall under the Rs.2.5 - 5 tax slab(category II), for which he pays 10% as tax amounting to Rs.25,000. On remaining Rs. 3 lakh, he falls in the 5-10 slab(Category III), and will therefore be taxed at 20%. This amounts to Rs.60,000. Hence, the total tax liability comes to Rs.85,000 (Rs.25,000+60,000).
Under the proposed tax rates, he would pay no tax on the first Rs.3 lakhs(Category I). The remaining 5 lakhs will fall in the Rs.3 - 10 lakhs tax slab(Category II), for which he pays 10% as tax amounting to Rs.50,000.
Therefore, there would be an overall tax saving of Rs.35,000 under the proposed tax rates.
Similarly, If a person has a taxable income of Rs.10 lakhs, he would end up saving tax up to Rs.55,000. In case a person has an income of Rs.20 lakhs, he would end up saving up to Rs.155,000 in taxes.
Other Direct Tax exemptions that the government could think about:
To give the benefit of the revenue that has been collected due to demonetization to the common man and to boost savings and investments, the government is likely to raise the maximum exemption limit:
Sec. 80C: Increase limit from Rs. 150,000 to Rs.200,000. Further, the overall cap of Rs.1,50,000 applies jointly to sec. 80C(LIC, PPF etc), 80CCC(Pension policies) and 80CCD (New Pension Scheme), which does not offer any meaningful benefit with multiple investments being clubbed under a single provision. These deductions can be simplified by introducing separate caps for different sub-provisions under these sections.
Deduction on Medical Insurance (Sec. 80D): Under the current tax rules, deduction of medical insurance premium is allowed only in year in which the payment has been made. There are Mediclaim policies in the market for which a single premium is payable in year one but the policy cover is for more than one year. Therefore, the government could consider amending the section to include pro-rata deduction on single premium paid in one year but deduction be allowed over the term of the policy, giving benefit in each year of the term. For eg:- Rs.60,000/- for a 5-year policy, Rs.12,000/- should be allowed each year starting from the year in which the payment has been made as deduction u/s 80D. Currently, whole amount of Rs.60,000 has to be claimed subject to the conditions prescribed under the Act, in the year of payment.
Deduction on Deposits with bank(Sec. 80TTA): With the massive deposits post demonetization with the Banks, the government could partake this benefit with the common man by extending the deduction of Rs. 10,000 on interest income earned from term/ fixed deposit bank account. Common man prefers to deposit their idle money in fixed deposits due to higher returns than in savings account, since the money is anyways kept in the banking channels, bank interest on all types of deposits should be exempt from tax and be included within the scope of sec. 80TTA.