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A new year comes with the promise of a new Budget. And with that comes the hope of lowering of taxes. Disheartening as it may be, not every year can mean you will pay less tax on your income. But a new budget can be a tool for simplification of taxes and of course correction for anomalies where they exist. A widening fiscal deficit means the government has less and less room to lower our tax burden. So with that expectation on the back burner, what it is that we can pin our hopes to in the Budget of 2018? Let’s take a look.
Most of us understand the concept of saving to make a big purchase but not many of us truly understand the money that we will need in our post-retirement years. Saving for retirement is critical so we can go through our twilight years with security and independence. Ask any Indian, and they will count upon EPF or PPF or a property to hold them in good stead when they are old and frail. While EPF is tax free, returns are low and corpus may not be sufficient to meet such goals. PPF has a maximum investment limit of Rs 1.5L so you cannot park a lot of funds there. NPS is one such product which can help taxpayers invest for retirement regularly and diligently. This money is allowed to be invested in equity to match your risk profile and it can offer over 10% returns over a long term. But NPS continues to be unattractive largely due to taxation of atleast 20% of corpus at the time of withdrawal. Besides, a majority must be mandatorily parked in an annuity. The govt must allow a higher corpus to be withdrawn without tax implication. As well as raise annuity rates for NPS. Besides, clarity is required on taxation of withdrawals made from tier 2 NPS account.
Perhaps this has been our long outstanding demand on saving tax on medical bills. A limit of Rs 15,000 is insufficient even for a small family. A single vaccination for a child can easily go upto Rs 2,000. Doctor consultation fees have also gone up significantly in the past few years. Therefore, the government must consider raising this limit to atleast Rs 30,000. Doctor fees and medicine bills are not covered under medical insurance premium. By raising this limit a family would be able to avoid tax burden on routine medical expenses.
India is progressing in many aspects, but several sectors are severely lagging behind. Sanitation, education, healthcare need funding and attention. A report from Bain estimates that India will be short by Rs533 trillion if it plans to realize its UN-mandated Sustainable Development Goals by the year 2030. Contribution of individual philanthropists can be critical in bridging this gap. While philanthropy is on the rise, allowing tax benefits can give it a major boost. Currently, tax benefits are only available on donations made under Section 80G or to projects eligible under section 35AC, both need to be pre-approved by the government. Allowing extended tax benefits to private individuals on large donations in education and healthcare sector, can be a great boost to the ultra-rich who are swell with funds but want to contribute according to mission of their own choice.
Even though RBI has cautioned investors that dealing in bitcoin is not authorized; bitcoins continue to be popular in India. Technology enthusiasts are attracted to the concept and want to gain from the phenomenal increase in its value. It is time for the government to spell out tax implications of investing in bitcoins. Clarity is also required on whether this will require disclosure in tax returns forms or not. So we hope this will be top of the mind matter for the department and there are details available soon, either before or during the budget.
With lower than expected indirect taxes collections the govt may be pressed to boost revenue by other means. One of them could be taxing long term gains from equity markets that currently enjoy 100% tax exemption. This could be a big dampener for the middle class that is finally waking up to the benefits of investing in equity over long term. A large amount of money has gone into the equity markets post demonetisation, so we hope this one does not make it to the FM’s budget to dos.
The govt has set up a special task force for simplification of direct taxes. We’ve expressed before how some aspects of our income tax law have become redundant. Take for example – exemption for children’s education allowance, which is Rs 100 per month per child. Or hostel allowance, which is Rs 300 per month per child. Or exemption allowed on clubbing of minor’s income of Rs 1500. And several others similar provisions that have become irrelevant in today’s time. Besides, the income tax act has become severely layered, with exceptions to the law, and then exceptions to these exceptions and so on. To top it all these exceptions apply in different financial years. We hope this task force will give the income tax act a fresh look and make it relevant to today’s time. Removing redundant exemptions and deductions, and raising the income exemption limit will help low income earners, as they would be free from filing of tax returns or submitting nil returns. The government can then focus its resources on the high income earners. This exercise however must happen without causing a dent to direct tax collections.
On a positive note, under Section 80C, the government could raise the limit from Rs 1.5 lakhs to Rs 2 lakhs, an increase in the deduction that can be claimed. This step by the government would be heartily appreciated by all Individual taxpayers.