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A major chunk of India’s tax-paying population comprises salaried individuals. This class has always been dedicated taxpayers who pay their taxes on time. One of the prime reasons for the same has been their income is subject to deduction of taxes at source (TDS) by the employers.
However, compared to those with business income, salaried taxpayers often feel more neglected with respect to the effective tax burden borne by them. A salaried taxpayer earning INR 10 lakhs per annum ends up paying more taxes than a businessperson earning similar income due to the numerous deductions available in computing business income. Standard deduction was introduced to address this gap; however, salaried individuals feel more needs to be done.
Like every year, they have a long wish list for this year's budget. However, considering the fiscal deficit pressure and expectations from different stakeholders, especially MSMEs and other businesses affected by Covid, it may not be feasible for the government to assess all the demands. Therefore, these expectations should be considered for Budget 2022 and beyond.
The slab rates were changed last in the Budget 2014. Hence, the overall tax burden should be reduced by increasing the tax slabs or lowering tax rates. Though the government introduced a new optional personal tax regime in 2020 which provides an option to individuals to be taxed at lower rates. However, most of the deductions or exemptions available for salaried individuals cannot be claimed under the new regime. Therefore, in our experience, a large part of the salaried taxpayers have continued to opt for the old scheme. Taxpayers feel that the new scheme should be made more attractive.
The standard deduction seeks to provide some relief for employment-related expenses. For example, in today's world, a salaried employee needs to keep himself updated on the work front, including developments in the industry/sector, general awareness, etc., by upskilling with additional courses or reading books/journals.
Finance Act 2019 enhanced the standard deduction limit to INR 50,000 from INR 40,000 for salaried taxpayers. However, this was primarily a replacement for the exemption available on transport allowance of INR 19,200 per annum and medical expenses up to INR 15,000 per annum. The net effect of reducing taxable income was only a meagre INR 15,800 per taxpayer. Hence, the standard deduction should be increased to INR 100,000 in the upcoming budget, considering the inflation over the years since the time it was introduced and expenses incurred in work-from-home requirements forced upon by Covid.
The remote working or work-from-home model is one of the aftermaths of the Covid-19 pandemic and is likely to stay. Most companies have shifted to hybrid working models, mainly in consultancy, IT, BPOs, etc. This has benefited the corporates with reduced infrastructure costs but increased expenditure incurred by employees in the form of internet, telephone and broadband charges, electricity, furniture to set up home offices, etc. To cover such costs, some companies have granted fixed allowances while others are reimbursing expenditure on production of actual bills. Under the current law, a lack of clarity prevails over the taxation of these allowances/reimbursements. It would help to provide necessary guidance on this subject to avoid unnecessary disputes and litigation in the future.
Interestingly, some countries like the UK and Canada have provided specific tax relief for additional costs to set up home offices.
Corporates have increasingly used Employee Stock Option Plans (ESOPs) to retain and hire good talent, particularly start-ups. Currently, ESOPs are taxed twice, first as perquisites (perquisite tax) when exercised on the Fair Market Value (FMV) on the date (of exercise) and, second when the employees sell shares as capital gain tax. Capital gain tax is calculated on the incremental difference between the sale price and the FMV on the date of exercise.
Finance Act 2020 provided some relief to employees of eligible start-ups but wasn't adequate. It's crucial to note that valuations of start-ups vary considerably, and uncertainty hounds whether a start-up will be able to survive or scale up. The tax paid by the employees is a real cash outflow when taxed as a perquisite on the exercise of options. In this case, taxation should happen only at the sale of shares. Only at this point do the employees realise the real benefit in cash terms, and any gain before that is only notional.
The present 80C limit of INR 150,000 has not been increased for several years and requires reconsideration. The revised monetary limit will help increase the savings of individuals, keeping in mind the inflation rate. The quantum of deduction under Section 80C may be increased from INR 150,000 to INR 250,000. These funds can be channelised to sectors adversely impacted by the pandemic.
Section 80D of the Income-tax Act provides an exemption from Mediclaim insurance premium paid. This exemption is up to INR 25,000 (for individuals under 60) and INR 50,000 (for those above 60). There is a need to revise this limit due to the pandemic and, simultaneously, inculcate the habit of opting for adequate medical insurance cover in society.
Many employees have received financial assistance from their employers during the pandemic to meet covid treatment expenses. Though the government had issued a press release stating that such amount received from the employers will not be taxable as perquisite in the hands of the employees, no specific amendment or circular was issued in this regard. This has led to practical challenges at the tax withholding stage by employers, which needs urgent redressal.
Presently, the home buyer can claim a deduction of up to INR 200,000 towards interest payable during the year on a loan taken to purchase or construct a self-occupied or let-out house property. With increasing property costs, this limit is not sufficient to cover the interest cost incurred by the individuals. Hence, there is a need to revise this limit and introduce separate deduction limits for self-occupied and let-out house property. This will also boost the real estate sector and have a ripple effect on other allied industries like cement, steel, and transportation and generate employment.
There are no easy answers to meet all the expectations, and it is a tight rope walk for the government to prioritise its budget allocations. Nevertheless, there are always expectations around the budget and any meaningful tax relief will only bring in some respite to the taxpayer who is driving India's pursuit to become a developed economy.
This article was originally published on Times Now.