Direct tax policies in India have gone through significant changes in response to the changing times. A number of attempts have been made at improving the income tax structure for salaried taxpayers since the Income Tax Act came into existence in 1961. However, despite a string of reforms carried out, salaried taxpayers continue to feel pain with various income tax provisions.
Let’s check out these archaic rules related to salaried taxpayers that, experts feel, should either be tweaked or, better be done away with for the benefit of taxpayers.
“There are ample instances of cases where the provisions of the current Income Tax Act are based on outdated financial benchmarks or are plainly not based on just and fair aspects, which may need to be tweaked,” argues Mahesh Padmanabhan, Director, Relaxwithtax Consultants, Mumbai.
It goes without saying, though, there’s no quick fix for these anomalies and any step toward reforming them should be taken after detailed analysis of their impact.
You, Me & Retail Investor
The first fundamental anomaly is related to ambiguity on the definition of a retail investor. The amount a retail investor can invest in different instruments such as stocks, mutual fund and tax-free bonds differ widely. For instance, a retail investor in an initial public offering (IPO) is the one who can invest up to Rs 2 lakh, while the threshold is Rs 10 lakh for a tax-free bond and Rs 5 lakh in case of a mutual fund.
“The definition of retail investor especially with reference to share transactions etc. is not yet spelt out by the income tax department which might cause a lot of problems to the genuine taxpayers who are interested to invest in equity,” says Subhash Lakhotia, leading tax consultant who appears in the popular TV show ‘Tax Guru’ on CNBC Awaaz channel.
Section 80D of the income tax Act deals with deductions on medical or health insurance premium for self, spouse and dependent children for upto Rs 15,000 annually. For dependent parents who are senior citizens, the deduction is allowed for upto Rs 20,000. Further, as per Section 17 (2) of the Income Tax Act, medical expenses such as medicines and doctor's consultancy fees that are not covered by mediclaim policy, to the extent of Rs 15000 and reimbursed by an employer are exempt from tax.
However, experts believe the current limit of Rs 15,000 is grossly inadequate considering the surging inflation and rising cost of medical expenses.
“As medical expenses are much higher especially as employees age, the exemption limit may be increased to at least Rs 40,000-50,000 per annum or slabs can be created depending on age of an employee to help them meet medical expenses along with inflation,” says Kiran Kumar Kavikondala, Director, WealthRays Group, Bangalore.
Ameya Kunte, Executive Editor and Co-founder of Taxsutra.com, has another suggestion to make. As per the current provisions, he says, an employee is entitled to deduction upto Rs 15,000 for medical expenses, provided he submits relevant bills for expenses. This also leads to several employees engaging into unscrupulous practices, so as to reach to the limit of Rs 15,000, he adds. Considering an important social angle involved in this benefit, apart from enhancing the limit, the government should do away with the system of insisting on bills etc and instead provide it as a standard deduction to salaried employees, he maintains.
Another anomaly is the provision related to Leave Travel Concession (LTC). As per Section 10 (5) of the Income Tax Act, 1961, an exemption is available to a person for expenses incurred on travelling to any place in India with his family. However, as per the Act, the exemption is provided twice in a block of every 4 years.
Experts believe this could be tweaked to four times for every four years. Also, travel exemption could include travel abroad along with boarding/lodging which are missing in the current provisions.
“The current rules on LTC, for example block period of 4 years etc, are complex. In order to promote domestic tourism, government should allow LTC on annual basis and do away with block years’ concept,” says Kunte of Taxsutra.com. Moreover, the fact that exemption is not available to the family members if they travel without the employee who is herself/himself not on leave from work, renders this provision more complex.
“The aspects connected with the travel concession are really unrealistic because as per the existing laws one can travel to any part of India and the expense will be allowed as a deduction. But if he were to travel abroad even at half the cost, the same will not be allowed exemption and the entire LTC amount received by the employee would be taxable. This provision requires to be amended by the tax department,” as Lakhotia sums up.
Section 80GG of the income tax Act deals with deduction for rent paid. In case you’re a self employed individual or in case of a salaried individual, who does not have a House Rent Allowance (HRA) component, then you may claim a deduction for the rent paid by you.
There’s a contradiction, though. “The income tax law provides for a deduction equal to 25% of the salary which sounds pretty very good. But the next portion of the provision says that this deduction is limited to Rs. 2,000 per month,” points out Lakhotia.
Related to it is the wide difference in the tax treatment for rent-free house between government and private sector employees. Experts believe there should be a uniform system of taxing salary and perquisites of government as well as non-government employees.
In case of government employees (both central and state), the perquisite charged to employees is the license fee that the government decides for the accommodation provided to its staff, which might be ridiculously low in comparison with what would have been the actual rental, explains Padmanabhan of Relaxwithtax Consultants.
As against this, in the case of a private sector employee, the perquisite would be charged at 15% of salary (in cities where population is more than 25 lakh) or if the accommodation is taken on lease then lower of 15% of salary or the rent paid.
Multiple Properties=Multiple Woes
As per tax laws, if you own more than one house property you are liable to pay tax, even if you have not earned any income out of your property or even if it remains unoccupied. This means you’re liable to pay tax not only for the house that you occupy but also for the house that is unoccupied.
This provision, believe analysts, is a pain for taxpayers. “Individuals owning multiple properties, which have not been let out on rent might have to contend with double whammy i.e. they could be hit with income tax on the deemed rent and at the same time may become liable to pay wealth tax @ 1% of the net wealth of which these properties may become part of,” argues Padmanabhan.
Raise The Bar
Currently, the threshold for tax exemption for individual taxpayers is Rs 2 lakh per annum — a limit experts believe should be raised in order to align with the high inflationary regime and to provide relief to a common taxpayer.
“Though the current threshold exemption envisages zero tax status for the lower income group, it would be ideal to have the same pegged at around Rs. 3 Lakhs, which may effectively enable income earners of up to Rs. 5 Lakhs p.a. to be out of the tax ambit considering the tax investment deductions available to them,” says Padmanabhan.
If you gift to your spouse, in cash or kind and if that gift generates income it will be clubbed with the income of the giver and taxed accordingly, as per Section 64 of the income tax Act. For instance, if you buy a property in your wife's name (whether working or non-working), the rent coming from that property would be clubbed with your income and taxed at the applicable rate. Similarly, if you gift cash your wife and she deposits it in a bank FD, the interest on the FD would be clubbed with your income.
However, experts believe this clubbing provision should be amended.
"The provisions relating to clubbing of income with the spouse especially when the husband were to make a gift to the wife and income arising to her is to be added with the income of the husband is one such provision of the law which is without any basis and the same is required to be amended instantly,” maintains Lakhotia.
Apart from them, there are various other silly provisions in the current tax structure that need a relook. These include provisions such as food allowance of Rs 50 per meal per working day, transport allowance of Rs 800 per month and children education allowance of Rs 100 per child per month for two children.
Another silly provision in the tax system is exemption from tax regarding medical treatment abroad, as per Section 17 of the income tax Act. As per this section, the expenditure incurred on travel abroad by the patient/attendant would be excluded from perquisites only if the employee’s total income does not exceed Rs 2 lakh.
As Lakotia argues, “Every sensible person will agree that an employer would spend on the foreign treatment of the salaried employee if he is very senior one. To the best of my knowledge I have never met an employee who is having yearly income of less than Rs 2 lakh and the employer had to spend on his treatment abroad. Thus, this silly provision of putting a cap of Rs 2 lakh should immediately be done away with.”