While it is amply clear that finance minister Nirmala Sitharaman may desist yet again from providing any relief on the personal income tax slab, additional tax saving avenues to the individual tax payers to boost consumption in the economy are the key expectations.
A number of tax saving avenues like the 80C exemption limit, tax deduction to the investment in PPF, standard deduction and further streamlining of the long-term capital gains (LTCG) are some of the avenues on which the government has received multiple representations, according to a source close to the development. This includes enhancing the standard deduction too, which if announced, will come as a huge reprieve to the salaried taxpayer.
“The exemptions side suggestions are being closely examined,” says a source.
Section 80C of the Income Tax Act offers tax deductions on investment up to ₹1.5 lakh on investments made towards life insurance policies, equity linked savings schemes, home loan principal repayment and select postal savings schemes. A growing view ahead of the budget is that the exemption limit of ₹1.5 lakh, which has not been changed since 2014, now needs to be revised. “The wider point is that does our personal tax system need a complete fresh look as the slabs and the rates have remained unchanged for a long time. Inflation adjustment is needed. A salaried employee would like to contribute more towards social security, a better pension plan but there may not be enough tax incentive to that,” Sumit Singhania, partner at Deloitte India, told Fortune India.
The exemption limit was last raised from ₹1 lakh to ₹1.5 lakh in 2014 when the BJP led NDA came to power at the centre. The move in the first budget after BJP won a thumping majority in the general elections was also a gesture to the middle class which had enthusiastically supported the party in the run up to the elections. Nonetheless it brought the much needed reprieve for the taxpayers who had faced a high inflation regime – especially the crippling food inflation -- during a large part of the Congress led Manmohan Singh rule during the UPA – II.
Multiple agencies, including the Institute of Institute of Chartered Accountants of India (ICAI), have again been demanding an enhancement of the exemption threshold for quite some time now.
Apart from the 80C deductions, the ICAI has also called for additional tax deduction on PPF contribution. “The PPF contribution limit of ₹1 50 lacs, may be increased, so that benefit is available to all sections of society. The government would also have a good long term source of funds. Considering inflation and need for social security for people when they are aged, the limit may be increased further as deemed suitable,” ICAI said in its pre-budget memorandum.
“This limit of ₹1.50 lakh was set in 2014 (it was increased from ₹1 lakh to ₹1.50 lakh in 2014) and considering inflation and need for social security for people when they are aged, the limit may be increased to further,” it added.
As per the representations received by the ministry of finance, a section has also demanded uniformity in the long term capital gains tax across the asset classes. LTCG rates vary on various asset classes depending on the holding tenure as well as the type of the asset. This needs to be synchronised. Holding period for listed equity for the purpose of LTCG is one year, while it is two years in case of unlisted shares. Holding period in the case of a listed debenture for LTCG to be applicable is one year while it is three years for unlisted ones. Similarly, LTCG is applicable if equity mutual funds are redeemed after one year while in case of the debt mutual funds it is three years.
Additionally, since no tax rate reprieve is in the offing, the finance ministry may enhance the standard deduction of ₹50,000 in the upcoming budget. Standard deduction of ₹40,000 was introduced by the then finance minister Arun Jaitley in 2018 and was enhanced to ₹50,000 by Piyush Goyal in 2019 when he presented the budget while holding additional charge as finance minister.