The salaried class has a lot of expectations from the budget. Apart from changes in tax slabs and tax rates, their demands can be categorized into five major heads:
- Increase archaic exemption / deduction limits
Some exemptions like conveyance (Rs. 1,600 per month) and child education allowance (Rs. 1,200 per child per year) have not been changed for many years. Taking normal inflation into account they should at least be doubled or cap increased for Tier I / II cities. Which private school has fees of Rs. 100 per month? Like-wise medical reimbursement cap is currently Rs. 15,000 per annum. With increase in health care expenses this should also be doubled.
- Removal / Increase of ceiling on Housing Loan Interest
Currently, there is a cap of Rs. 2 lakhs on deduction for interest on housing loan. Two-thirds of unsold flats in Mumbai cost over Rs. 1 crore. Assuming base price of Rs. 1 crores, a Debt:Equity ratio of 80:20, a loan of Rs. 80 lakhs for 20 years, results in upwards of Rs. 4 lakhs p.a. as interest amount. If cap is removed, and one can claim actual interest paid as deduction from income, this could provide a boost to the construction sector which is currently witnessing a slowdown.
- Removal / Increase of ceiling on Investments
Currently, there is a cap of Rs. 1.5 lakh for investments under Sec. 80C. This cap on tax investments discourages further savings. If deduction is provided based on actual investments, one could see a spurt in savings which would provide additional money in circulation in the economy with banks, insurance firms and mutual funds. The deduction for principal component of loan taken should be removed from this section and clubbed with housing loan interest.
- Treat sale of house in same manner as equity
In India, selling a home within 3 years of ownership invites the same taxation rate as your current tax slab. If the property is owned for more than 3 years, no taxes are to be paid if and only if the seller reinvests the money in property again. In case of the equity, long term gains for stocks held for more than one year, are not taxed while gains from sale for equity within one year are taxed at 15%. The property market would become a much better traded market with a better price discovery if it were taxed exactly in the manner as equity gains.
- Bring back Standard Deduction
Standard Deduction was done away with in 2006. Professionals and corporates can claim all expenses incurred while earning income as deduction. Taxes are computed on this net income for them. A salaried tax payer also incurs expenditure while earning his salary – conveyance, salary of driver (if applicable), food and refreshments, clothing, stationery etc. Standard deduction would ensure some sort of parity. Critics claim that salaried class gets a host of deductions and there is no need for a on the top standard deduction. But they forget that these are directed tax cuts, you get a deduction, only if you purchase a house or invest in certain schemes. Additionally, all deductions are subject to caps which is not the case with professionals and corporates.
Let’s see how many of these demands are met by FM Jaitley given the fiscal deficit constraints.