Thursday, 18 April 2019
BREAKING NEWS

Great expectations from Budget 2019? Find out if they can be met – Economic Times

Even though this is an interim Budget, the NDA government may offer big tax cuts to woo the middle class before the general elections. ET Wealth reached out to taxpayers and financial experts to know what they want or expect to see in the Finance Bill 2019. However, matching these expectations will be a challenge. Already, as per the Budget estimates, the top 10 tax incentives will result in a revenue loss of Rs 75,252 crore this year (see graphic).

Will people’s expectations burn a big hole in the exchequer? Many people want the basic tax exemption for general taxpayers to be raised to Rs 3 lakh. This would also require hiking the basic exemption for senior citizens to at least Rs 3.5 lakh. In a way, the basic tax exemption is already Rs 3 lakh for roughly 2.7 crore taxpayers with incomes up to Rs 3.5 lakh by way of the Rs 2,500 rebate under Sec 87A. Of the 5.7 crore people who file their tax return, almost 1.5 crore have an income of over Rs 3.5 lakh. If their basic exemption is hiked by Rs 50,000, roughly Rs 75,000 crore will escape the tax net, resulting in a tax loss of Rs 3,750 crore (5% of the amount). Add the higher exemption to senior citizens and both measures could jointly cost the exchequer upwards of Rs 4,000 crore.

#10yearchallenge for taxpayers: You are not paying more tax now incover1
* Incomes for previous years have been deflated using the Cost Inflation Index
** Taxable income is net taxable income after all deductions and exemptions

Then comes the call for a higher limit under Sec 80C, with the argument that the limit was last enhanced five years ago in 2014. This is correct, but don’t forget that the tax saving limit was enhanced in 2016 by Rs 50,000 for NPS contributions under Sec 80CCD(1b). So, the overall limit is already Rs 2 lakh. Hiking the limit by Rs 50,000 would put pressure on revenues. Even if we assume that only one crore taxpayers will avail of the higher limit, a gigantic Rs 50,000 crore will escape the tax net, resulting in a tax loss of Rs 15,000 crore.

Some experts have demanded the removal of tax on dividends. They say that companies pay taxes and pay dividends out of post-tax profits, so it is unfair to tax this dividend again when it reaches the taxpayer. While the government needs to review the dividend distribution tax on mutual funds, doing away with dividend tax on corporates may not be feasible. Tax collections from dividends was Rs 43,410 crore in 2016-17. Of this, Rs 41,417 crore came from company dividends and Rs 1,993 crore from mutual fund dividends.

Fiscal prudence rules out big tax cuts. ET Wealth did some number crunching and found that the effective tax rate for incomes below Rs 50 lakh has not changed much since 2009-10 (see graphic). Most taxpayers are not paying more than what they did 10 years ago.

These 10 tax benefits cost the exchequer over Rs 75,000 crore in 2017-18

Tax incentive Impact on revenues (Rs cr)
Tax saving investments under Sec 80C 58,933
Rebate for incomes below Rs 3.5 lakh under Sec 87A 6,598
Medical insurance under Sec 80D 2,347
Contributions to NPS under 80CCD 1,955
Higher exemption to senior citizens 1,369
Rebate to saving bank interest 1,250
Deduction for illnesses, disabilities 1,176
Education loan deduction under Sec 80E 692
Exemption to rent if not receiving HRA 569
Higher exemption to very senior citizens 363
TOTAL 75,252

Figures are budget estimates

1. Seniors need deduction for medicines
incovpt1 Vinay Nangia, 68 years, Dehradun Retired IIT professor

What he wants
Senior citizens should be provided a deduction or reimbursement for medical expenses (purchase of medicines), which is more important than the deduction for medical insurance premium under Section 80D. I also want the interest income exempt under Section 80TTB, from bank savings accounts, fixed deposits and post office deposits, to be raised to Rs 1 lakh for senior citizens, up from Rs 50,000 now.

Our assessment
Introduction of a separate deduction limit for medical expenses is real need for senior citizens as they incur huge expenses on medicines and are typically not covered by health insurance.

What experts expect
a. Higher Section 80C limit expt1a
Vikas Gupta, CEO, Omniscience Capital

The Sec 80C limit could be raised to Rs 2.5 lakh or even Rs 5 lakh. If it is Rs 5 lakh, other asset classes may get included within the limit. It could become a permanent retirement account from which investments across multiple asset classes can be made annually.

Our assessment
Considering inflation, a hike in limit for tax deductible savings is justified, but would result in a big tax loss. Even if limit is hiked by Rs 50,000 and only one crore taxpayers avail of it, a gigantic Rs 50,000 crore will escape tax net.

b. Increase in standard deduction
expt1b
Archit Gupta, CEO, Cleartax.com

There could be an increase in standard deduction from Rs 40,000 to Rs 50,000. This move will benefit 80-90% of salaried taxpayers. Removal of tax exemption for medical and transport allowances nullifi ed the impact of standard deduction last year. Hiking it will made the deduction more meaningful.

Our assessment
This is a valid demand. Someone drawing transport and medical allowances got a net benefit of Rs 5,800. Taxpayers earning Rs 5 lakh a year saw their tax cut by only Rs 300.

2. Extend tax holiday for startups to 5 yrs
incovpt2
Rahul Varma 24, Hyderabad, Entrepreneur

What he wants
The tax holiday of three years, currently accorded to startups under the Central government’s Startup India Scheme, to be raised to five years because that is the time a startup usually takes to stabilise itself. I also want the number of government-sponsored incubators and accelerators in metro cities to be raised and taken to lesser known private colleges.

Our assessment
With 1,200 new startups and $4.2 billion of funding in 2018, an extension of the tax holiday period will spur a further growth among startups.

What experts expect
a. Revised tax slab rates
expt2a
Adhil Shetty, CEO, BankBazaar

The 20% tax rate could be cut to 15%. The income slabs may be changed so that those earning Rs 2.5- 7 lakh would be taxed at 5%, Rs 7-12 lakh at 20% and above Rs 12 lakh at 30%.

Our assessment
A rate cut and widening of tax slabs will reduce your tax outgo. If your net taxable income after deductions is Rs 8 lakh, at the current rates you are paying Rs 75,400 in taxes. If the rate is reduced to 15%, the tax outgo will become Rs 59,800. If the income slabs are widened, the tax outgo will be Rs 44,200.

b. Lowering the LTCG cut off limit
expt2b
G. Pradeep Kumar, CEO, Union Mutual Fund

The government is expected to bring down the long term capital gain cut off limit of debt funds from three to one year. This will align debt funds’ long-term capital gain time limit with that of other capital market securities. This will mean tax relief for debt investors.

Our assessment
Since revenue loss from this action will be much less compared to other possible measures like removing capital gains tax on equities, or removing STT, the government may settle for this one.

3. Extend tenure of tax breaks on education loans
incovpt3
Ankit Aggarwal, 27, Bengaluru, Entrepreneur

What he wants
An MBA degree can set you back by Rs 25-30 lakh. This cost will only increase, making it difficult for anyone to fund their higher education without a loan. The interest paid on education loan can be claimed as deduction only for the first eight years. A tenure of eight years means very high EMIs. The government should extend this tenure to 12 years or more to ease the EMI burden.

Our assessment
This tenure has remained unchanged since 2006 whereas tuition fees of top B-schools has risen sharply since. Fees of IIM Ahmedabad have risen from Rs 1.77 lakh in 2006 to Rs 22 lakh in 2019. Given the spike, it is time the government extended the tax benefit to at least 12 years.

What experts expect
a. Extension of NPS tier II benefits
expt3a
Kuldip Kumar, Partner and Leader, Personal Tax, PwC

Last December, the government announced that contributions by government employees in the Tier II account of NPS with a lock in of three years will be eligible for tax deduction under 80C. The government is expected to extend this benefit to private sector employees.

Our assessment
Extending this benefit to all salaried taxpayers will bring NPS on par with ELSS. Earlier, only investments in Tier I account qualified for deduction under Sec 80C.

b. Hike in tax exemption threshold to Rs 4 lakh
expt3b
Arun Thukral, MD & CEO, Axis Securities

The income tax exemption threshold could be raised from Rs 2.5 lakh to Rs 4 or 5 lakh. In case of change in the exemption bracket, the tax rates for the slabs may also change. There can be some tinkering with deductions under Section 80C to incentivise savings.

Our assessment
Increase in tax exemption limit will mean more disposable income for taxpayers. This could lead to consumption driven economic growth. However, loss of revenue may create pressure on bond yields and interest rates.

4. Raise home loan interest deduction
incovpt4
Samarth Sharma, 34, Gurgaon, Enterpreneur

What he wants
The tax benefit on home loan interest under Section 24 should be raised to Rs 3 lakh, especially for those in metro cities, given the higher cost of living. Currently, individuals with a home loan for self-occupied property get a deduction of up to Rs 2 lakh.

Our assessment
Tax deduction on home loan interest was last raised from Rs 1.5 lakh to Rs 2 lakh in 2014-15, and given the rising cost of living in the ensuing five years, it is time that this limit was raised.

What experts expect
a. Home loan deduction at Rs 5 lakh
expt4a
Raj Khosla, Founder and MD, Mymoneymantra.com

There was a time when you could buy a house worth Rs 30 lakh with a home loan of Rs 20-22 lakh. At 9%, the interest worked out to around Rs 2 lakh a year which got covered by the deduction under Sec 24. Now, the same house costs more than Rs 60 lakh and needs a loan of Rs 50 lakh. The interest is more than Rs 5 lakh. The Budget should hike the deduction limit to at least Rs 5 lakh to make housing affordable.

Our assessment
Hiking the deduction limit would cut cost of capital, stimulate demand and give the much needed fillip to the real estate sector.

b. Scrap all forms of dividend tax
expt4b
Aashish Somaiyaa, MD & CEO, Motilal Oswal AMC

A dividend distribution tax on distribution of tax paid income of companies and then further tax in hands of recipients of dividend over Rs 10 lakh amounts to taxation of same income at multiple levels. These need to go.

Our assessment
Companies pay dividend distribution tax at 15% on dividend. Equity funds also pay 10% tax on dividend paid to unit holders. This amounts to double taxation and can be scrapped. However, doing away with all forms of dividend tax may not be feasible.

5. Create a new section for ELSS funds
incovpt5
Bal Govind, 45 years, Noida, Entrepreneur

What he wants
ELSS investments should be excluded from the Section 80C deduction list and made into a separate option under a new section. It will encourage retail investors to move a chunk of their savings into equity as most savings remain debt-oriented. Considering infl ation-adjusted returns on our debt savings like the PPF or five-year fixed deposits, one should have a reasonable equity exposure in mutual funds for good overall returns.

Our assessment
Most people exhaust the Section 80C investment limit of Rs 1.5 lakh in debt instruments like the PPF, EPF and tuition fees. This will encourage people to invest in equity funds.

What experts expect
a. Tax deduction for home insurance
expt5a
Rikhil Shah, Chief Financial Officer, SBI General Insurance

To avoid situations like what happened during the recent floods in Kerala, the government should incentivise home insurance by providing tax deduction and I expect this to happen in the coming Budget. There is no need to club this in Section 80C. The government should create a separate section for home insurance.

Our assessment
This is a genuine demand. Taxpayers may not get much benefit if this is also clubbed in 80C. However, the government may do so to avoid any tax loss from this new initiative.

b. Separate tax bucket for term plans
expt5b
Vineet Arora, MD and CEO, Aegon Life Insurance

We hope for a separate bucket for pure protection term insurance offering tax benefits of up to Rs 25,000. The government could also create a separate protection basket, clubbing the existing tax break on health insurance premium and the new term insurance premium deduction.

Our assessment
A separate tax-saving limit for pure protection term plans is a reasonable ask. However, a poll-bound government might focus more on direct, eyeball-grabbing tax benefits.

6. Separate deduction for term plans
incovpt6
Divya Shah, 29, Ahmedabad, HR professional

What she wants
Life insurance is an important part of financial planning and hence it should have a separate deduction limit of up to Rs 20,000. This move will also make space in Sec 80C for other investments.

Our assessment

An average salaried taxpayer can easily exhaust the Rs 1.5 lakh 80C limit through a mix of EPF contributions, home loan principal payments and tuition fees. This may not leave much room to claim deduction on life insurance premiums. A separate deduction limit for term plan will increase penetration.

What experts expect
a. Increase in 80D limit
expt6a
Shreeraj Deshpande, Principal Officer, Future Generali India

The government could revise deductible limits for health insurance premiums under Sec 80D to Rs 50,000 for self and family.

Our assessment
Family floater plan premiums depends on the age of the eldest member in the family. While Rs 25,000 is enough for families where the age of the eldest member is less than 45 to buy health insurance worth Rs 10 lakh, it become insufficient when the age of the eldest member crosses 45.

b. Wider Sec 80C umbrella
expt6b
Prableen Bajpai, Founder and Managing Partner, FinFix Research & Analytics

Currently, only equity-linked saving schemes (ELSS) are eligible for tax deduction up to Rs 1.5 lakh under Section 80C. This should be extended to all mutual funds that complete a 3-year lock-in period including debt funds which are favoured by conservative investors.

Our assessment
While debt instruments such as PPF get Sec 80C benefits, including debt funds will provide investors greater choice. Also, singling out just a few equity schemes with a 3-year lock-in for tax benefits seems arbitrary.

(With inputs from Riju Mehta, Narendra Nathan, Shipra Singh, Sanket Dhanorkar, Vinay Dwivedi and Preeti Kulkarni)

Source: https://economictimes.indiatimes.com/wealth/personal-finance-news/great-expectations-from-budget-2019-find-out-if-they-can-be-met/articleshow/67699649.cms

« »