Union Budget 2021: What taxpayers can expect from FM Nirmala Sitharaman on the personal tax front : 15-01-2021

Union Budget 2021-22 Expectations for Taxpayers: One of the most eagerly-awaited annual policy announcements by the government in the last quarter of the fiscal year – Union Budget – is around the corner. With a few weeks to go, similar to every year, individual taxpayers are really hoping for a Budget which leaves more money at their disposal. This is especially considering the hardships and challenges caused by the COVID-19 pandemic on their livelihood and on overall economy.

From the government’s perspective, in addition to the reforms already announced, several measures particularly to boost domestic consumption of goods and services and to revive the economy at a faster pace should be evaluated from a holistic perspective.

The wish list on the personal tax front emanating from COVID-19’s adverse impact and other circumstances is as under:

Separate deduction for COVID-19 treatment

Currently, a few deductions have been prescribed under Chapter VI-A of the Income-tax Act, 1961 (the Act) for medical treatment for self or dependent suffering from disability/severe disability (Section 80DD, 80U of the Act), medical treatment of prescribed diseases and ailments (Section 80DDB of the Act). However, there is no specific deduction under the Act which covers treatment cost for COVID-19 patients who are not covered under any health insurance.

Donation made to the PM CARES Fund designed specifically for providing COVID-19 relief is eligible for 100 per cent deduction u/s 80G of the Act, but no corresponding deduction has been notified for expenses incurred on treatment of disease itself.

Given the substantial cost involved in COVID-19 treatment in government or private hospitals, a separate deduction capped up to INR 1,00,000 or actual treatment cost incurred by the taxpayer for self or family, whichever is lower, may be considered to be introduced under the Act to provide much-needed relief to the taxpayers specially when such costs are not covered under a health insurance policy.

Provision for furniture by employer

Outbreak of the COVID-19 pandemic in March 2020 in many ways compelled organisations to implement Work from Home (‘WFH’) policy for their employees during the lockdown period and post thereto. During such WFH situation, several companies endeavored to put in place necessary enabling infrastructure through provision of furniture (like tables, ergonomic chairs, etc.), high speed internet, printers, desktops, stationery, etc. for ease of working at their employee’s residences to ensure conducive work environment.

Some companies decided to grant a fixed allowance to employees to meet the expenditure on such furniture/ other items, while others decided to provide a reimbursement. While both the allowances and reimbursements are necessitated by the business requirement, these benefits have the potential of being taxed in the hands of the employees as a perquisite.

As this situation has not been expressly dealt with in the Act or the Rules made thereunder coupled with a fact that WFH on a large scale appears to be a long-term norm now, some tax relief specific to work from home scenario may be provided to an individual taxpayer and their employers.

Realignment of income slabs/ tax rates

For individual taxpayers below 60 years of age the income tax exemption limit is INR 2.5 lakh p.a. This limit has remained unchanged from Financial Year (‘FY’) 2014-15.

Last year the Budget 2020 provided some relief to taxpayers by allowing them to choose between the existing tax regime and an alternative optional new tax regime. Needless to state that for taxpayers to take advantage of the new tax regime, a host of exemptions/ deductions were to be foregone.

While the new tax regime had lower tax rates, the ultimate benefit to taxpayer was basis the deductions/ exemptions otherwise he/ she was eligible to.

Hence, with the objective of simplifying this further and enhancing the net disposable income it may be considered whether the basic exemption limit under the existing tax regime can be enhanced to INR 5 lakh itself. This would also need to be assessed basis the potential number of taxpayers (estimated at 3.5 crore) who may fall out of mandatory tax return filing requirement.

Subsequently, the other slab rates both under the existing and new regime can be adjusted basis the revised limits in line with the progressive tax rate system India has always adopted.

Housing tax breaks

To reignite the momentum in the real estate sector, the government may assess enhancing the standard deduction of 30 per cent of Net Annual Value to 50 per cent and/or enhancing the current limit of deduction for interest payable on housing loan on self-occupied properties to INR 4 lakh p.a.

Taxability of employer contribution to retirals

Section 17(2)(vii) of the Act was amended by Finance Act, 2020 to cap the employer contribution to Recognised Provident Fund (RPF), Superannuation Fund and National Pension System (NPS) up to INR 7,50,000 per annum. Accordingly, the aggregate of such employer contributions exceeding INR 750,000 was made taxable as perquisite.

There is a dearth of clarify in respect of whether this new limit shall be superimposed over the individual existing limits for each such contribution.

It is expected that a clarification is issued on whether the existing individual limit for each of the employer’s contribution to RPF/ NPS (viz. 12 per cent of salary and 10 per cent of salary respectively) should be considered prior to applying the monetary cap of INR 7,50,000. Further, a clarification is needed on the taxability of the contributions (already taxed as per such above), considered as perquisite in the year of contribution and at the time of withdrawal. Suitable amendments should be made in the provisions which deal with taxability of these specified funds to avoid possible effective double taxation.

Increase in deduction u/s 80C

The limit of INR 1.5 lakh in respect of deduction under Section 80C of the Income-tax Act, 1961 (‘the Act’) for various common tax saving investments/ expenditure (such as employee provident fund, public provident fund, principal repayment of housing loan, children tuition fee, national savings certificate, etc.) has remained constant for almost half a decade now. Keeping in mind the current economic scenario – encouraging demand is one of the priorities of the government. With this in mind if individuals are encouraged to spend on expenses like school fees, housing etc., the government may hence consider increasing this to INR 3 lakh p.a. Alternatively, a separate deduction may be introduced (in addition to proposed enhanced limit) for certain high value transactions such as children tuition fee (keeping in mind the spiraling education cost over last few years), expenditure on specific items made in India, etc.

Expectations of a common man on personal taxes from the Budget 2021 are in summary to provide the household with extra disposable income accentuated due to COVID-19. The government has various factors like impact of the same in the economic activity and fiscal discipline to weigh before making a final decision.

Source : Economic Times