What are the expectations on the personal taxation front?

No discussion on the Union Budget is complete without focusing on personal taxes. It is normally a trade-off. People want to pay lower taxes, but the center still relies on tax flows to fund expenses. Here is what is expected on taxes.

Rationalize tax structure

Broadly, the expectations of lower taxes is bound to be there. One argument is that average rates of taxation is very high in India, compared to other EMs. This is more so with the peak rates that can go as high as 44% for the higher income groups. The other demand is to rationalize the entry level tax structure. Currently, income up to Rs5 lakhs is tax exempt, but that is through a complex rebate process. However, a person with income of Rs5.50 lakhs gets taxed from Rs2.50 lakhs onwards. It is time to just make Rs5 lakh the base exempt limit.

The second rationalization pertains to the dual tax system. Contrary to what the government expected, the shift to the new tax system is less than 1%. The reason is that the person opting for the new tax system has to forego all types of exemptions, which is unfair. What the Budget could do is two-fold. On the one hand, it can allow specific exemptions like standard deduction and health cover in the new system. The other option is to raise the basic exemption limit and just scrap the new tax system totally. That would be a smarter thing to do, as the current system has very few takers.

Make Section 80C meaningful

The highly popular Section 80C is not really delivering the results for the tax payers. Most of them are not even able to cover their PF contributions within the existing limit of Rs1.50 lakhs. Life cover and tuition fees are something most people do have and these fall outside the limit. The limit of Section 80C has not been changed in a long time. It is time to enhance the limit to at least Rs3 lakhs to make it more meaningful. In addition, the budget should look for carving out a special dedicated limit for ELSS investments, in the same way as there is a special limit for NPS in India.

Section 24 needs a tweak
The tax exemptions on home loans have become unnecessarily complex. There is a base exemption on interest up to Rs2 lakhs. There is a separate exemption for first time buyers and another exemption for low cost home buyers. In addition, the principal amount is included under Section 80C of the Income Tax Act. What the government could do in this Union Budget is to make some key shifts in this system. For instance, the home loan limit of Section 24 can be raised to Rs5 lakhs per annum. That would be more in sync with the housing costs in India and higher interest costs. Also, for the sake of simplicity, other exemptions can be integrated under this limit within the limit of Rs5 lakhs. That can be a good start on the Personal Tax front!

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