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Budget 2018-19: Tax payers’ wish list

Author: Balwant Jain/Saturday, January 6, 2018/Categories: Cover Feature, Expert View

Budget 2018-19: Tax payers’ wish list

With the budget day approaching, an individual tax payer wishes the Finance Minister to fulfil some of his  wishes. Since the common man is directly affected by the income tax provisions, he obviously have his expectations. Let us take a look at what he expects from the Finance Minister this time?

Tax provisions on NPS withdrawals

The present tax laws exempt only 40% of the withdrawals from NPS account at the time of closure of the account. The NPS subscriber is required to purchase a minimum annuity of 40% of the accumulated corpus in his NPS account. Remaining 20% of the money becomes taxable in the hands of the subscriber, unless the subscriber decides to use 60% of the total corpus for purchase of an annuity from an insurance company. I would  like to point out that the annuity becomes taxable as and when received. Put simply, effectively only 40% of the corpus is tax-free and the balance becomes taxable either immediately or in future.

It may also be noted that the Section 10 (12A) refers to an employee while giving the exemption of 40%. So it may happen that people who are not salaried and self employed at the time of withdrawal of the NPS money may not be able to avail the exemption of even the 40% which otherwise is available to an employee. So, this infirmity in the drafting of the provision needs to be removed immediately to grant the benefit intended to non-salaried tax payers and avoid litigation.

In contrast to the NPS withdrawal provisions making only 40% exempt at the time of withdrawals, the accumulated balance in employee provident fund comes tax free in the hands of the person who has contributed for employee provident fund. If the government cannot make the EPF balance taxable to the extent of 40% and bring it on parity with NPS provision, the government should, at least, attempt to bring in parity by working the other way round and make the entire accumulated balance in NPS at the time of withdrawal tax free.

Looking at the fact that the annuity products generally fetch only around 6-7% depending on the interest cycle which effectively is not even sufficient to beat the inflation, if you take into account the tax liability on such annuity. So the government should remove the mandatory requirement to purchase annuity and let the subscriber decide where he wants to invest his retirement corpus rather than the government imposing its wisdom.

Instead of tying the NPS subscriber to very unattractive product like annuity, the government should make some better products like Senior Citizen saving  Scheme of Pradhan Mantri Vaya Vandana Yojna, available to NPS subscribers where the return of the money invested is higher than what an annuity brings in.

Remove the limit of interest deduction for a house which is self-occupied

The tax laws allow you benefit of interest on money borrowed for the purpose of purchase, construction, repairs renovation of any house property. However, the amount of such claim is restricted to Rs. 2 lakh in case of one house which is self-occupied. In respect of a let-out property, there is no restriction and full interest is allowable as deduction though there is restriction on set-off of the loss under the head “Income from house property” against other source of income to the extent of Rs. 2 lakhs. And, the balance unabsorbed loss is allowed to be carried forward for set off against losses under the head house property in subsequent years.

Rationally the income tax benefits of full interest should be made available to the genuine home buyers who need the house for their own residence and not for the people who use the same as investment and do tax arbitrage. In case of loan for an under-construction house where the construction is delayed beyond a period of five years, the interest deduction gets reduced to Rs. 30,000 for no fault of the tax payers. This unjust provision of reduced deduction should also be removed altogether from the statute book to grant relief to the home buyers who are any way victim of the delay tactics of developers.

Revision in the monetary limit of deduction available under Section 80C, 80CCC and 80CCD

Presently, as per Section 80 CCE the deductions available under Section 80C, 80CCC and 80 CCD(1) taken together are restricted to Rs. 1.50 lakh per year. This limit of Rs. 1.50 lakh was revised from Rs. 1 lakh in 2014. The earlier limit of Rs. 1 lakh was fixed way back in 2003. It has been almost 14 years from the original limit of Rs. 1 lakh was fixed and has just been increased by 50% which works out to just less than 3% annually. This annual average increase has not even been equal to average inflation during the corresponding period. In my opinion this should be directly raised to Rs. 2.50 lakh to give relief and make people save money and avail tax benefits. We are a country of savers and the increased tax benefit will help divert the investment from physical assets to financial assets.

Benefit of expenses on medical treatment under Section 80 D to senior citizen.

Presently the amount of deduction available under Section 80 D for persons who have completed 80 years of age can be claimed in respect of the expenses incurred for medical treatment of such senior citizen upto Rs. 30,000 if they do not have any health insurance policy. Many senior citizens do not have any health insurance, so are not in a position to buy health insurance now due to health complications. If the government wants to give some benefit, it should be generous in actions as well and should not just look generous while providing such ineffective tax relief as there are only a few people who are tax payers  and have completed 80 years of age. The government should extend this benefit available under Section 80 D to persons who have completed 60 years.

Introduce separate limit or Principal repayment

As per present provisions of Section 80 C of the Income Tax Act, you are allowed to claim a deduction of up to Rs 1.5 lakhs from your taxable income, for the repayment of the principal amount of a housing loan taken for a residential house. The deduction is allowed only with respect to the principal amount that is repaid after completion of the construction.

This deduction is available along with other eligible items of expenditure, such as life insurance premium, stamp duty and registration charges for a residential house and tuition fees for two children. It also includes various items of investment, like contribution to Provident Fund and Public Provident Fund, investments in equity-linked savings schemes, National Saving Certificates, tax saving bank FDs and contribution to superannuation fund. This limit of Rs 1.5 lakhs also covers any amount paid for buying an annuity under Section 80 CCC and any contribution made towards the National Pension Scheme under Section 80 CCD(1).

Over the years, the amount of housing loan that is needed has increased, as the cost of residential houses have gone up significantly during the period from the time when principal repayment of home loans was made eligible for tax deduction. So the principal repayment on a housing loan generally exceeds the limit of Rs 1.5 lakhs, set under Section 80CCE. In view of the overcrowding of Section 80 C, 80CCC and 80CCD(1) and need for larger home loans, the finance minister should provide a separate deduction for repayment of home loans, in the ensuing budget. A leaf can be taken from Section 80EE, under which a separate deduction was introduced in 2013, for interest on home loans for first-time buyers.

The FM could consider extending the deduction on home loan principal repayment to cover money borrowed from anyone, including friends and relatives. Likewise, the tax payer should be allowed to claim tax benefits, even on principal repayments that are made before completion of the construction,  in case the EMI has already started. Such benefit on interest paid during construction is presently allowed to be amortised in five equal instalments.

Rationalization of provision of taxation of short-term capital gains on equity shares and equity oriented mutual funds

Presently short-term capital gains on equity shares and equity-oriented mutual funds units are taxed at flat rate of @ 15% where securities transaction tax (STT) has been paid. However, the regular income of an Individual and HUF is taxed at rate which varies from 5% to 30%.

This provision of 15% flat rate of tax was brought to provide boost for equity investment and to provide relief to investors. This has actually brought in effect ‘the law of unintended consequences”. For an individual who is in 5% slab rate has to pay tax on such short-term capital gains @ 15% which was not intended by the legislature, I urge the finance minister to correct this anomaly.

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Balwant Jain
Balwant Jain

Balwant Jain

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