Finance minister Arun Jaitley is set to present his first full budget under the Narendra Modi government later this week. As usual, the market is abuzz with expectations from the various sections of the budget as well as likely announcements.
The salaried employee is also looking forward to the budget with great hopes. The salaried class has suffered from low hikes and bonuses since the Global Financial Crisis (GFC) in 2008. This, coupled with high inflation levels under UPA II, eroded their real purchasing power.
What does the salaried class expect from this year's budget? Essentially, it is hoping for measures that will increase its disposable income or net cash salary in hand per month (post tax). It should be pointed out that corporate and individual income tax account for 78% of total revenue collections of the government. We have three tax slabs for individuals in India - nil to Rs. 5 lakh, Rs. 5 to Rs. 10 lakh and greater than Rs. 10 lakh.
The expectations of the salaried class depend on many factors like the income level, city in which they reside, working couple status, whether they have children or aged parents, whether they own a house or live in a rented apartment and the ability to save.
The disposable income of a salaried employee can go up: - with an increase in income exempt from tax levels - with an increase in deductions allowed from income - through decline in tax rates and/or increase in tax slabs.
Since a minuscule percentage of population pays taxes, significant decline in tax collections cannot be risked by the FM as this has implications for fiscal deficit position.
However, increase in disposable income in the hands of salaried class also has the potential to spur the economy. Higher income will either be spent or invested. So it is all about finding a fine balance.
I divide the expectations of salaried class into three categories: - Basic (Time horizon - immediate) - Aspirational (Time horizon - near term) - Utopian (Time horizon - long term)
1. Increase in exemption levels: Currently one does not pay any tax on the first Rs. 2.5 lakh earned. This should be increased to Rs. 3-3.5 lakh. On the flip side this has the potential to further reduce the already low base of tax payers.
2. Increase in basic deductions like conveyance allowance, child education allowance: Some exemptions like conveyance (Rs. 800 per month) and child education allowance (Rs. 1,200 per child per year) have not been changed for more than a decade. Taking normal inflation into account they should at least be doubled.
3. Increase in investment limits under Section 80C: The current cap is Rs. 1.5 lakh (increased last year by Rs. 50,000). This includes deductions for a host of investments like life insurance premium, contribution to provident fund / post office saving schemes, principal on home loan, etc. This needs to be substantially increased to minimum Rs. 3 lakh. India needs significant funds for infrastructure development. A special deduction of Rs. 50,000 should be introduced for investment in infra bonds. The deduction for principal component of loan taken for residential property should be removed from this section and clubbed with housing loan interest section for consistency and clarity.
4. Increase in deduction allowed for housing loan interest on self occupied property under Sec. 24: The current limit is Rs. 2 lakh which is very low. In a metro city, even a 1 BHK house costs Rs. 50 lakh and with a 80:20 debt equity component, people need to take a loan of Rs. 40 lakh. EMI for this would be minimum Rs. 5 lakh per year. This is more than twice the current limit. The principal component should be added to this section and combined deduction allowed.
5. Increase in medical reimbursement: Currently Rs. 15,000 is allowed as medical reimbursement. With increase in health care expenses this should also be doubled.
6. Increase in deduction allowed for medical insurance premium: Current limit of premium is Rs. 15,000. With this one can get a cover of Rs. 10-12 lakh for a family of 3 (2 adults and 1 kid). This should also be doubled keeping in mind the increase in premium by insurance companies.
7. Increase in tax slabs: In India, the peak slab is 30% which is applicable on income above Rs. 10 lakh. This is too low for the highest slab. Tax slabs need to be rearranged to Rs. 0-10 lakh (10% after exemption limit of current Rs. 2.5 lakh), Rs. 10-20 lakh (20%) and Rs. 20 lakh and above (30%).
8. Decline in tax rates: Asking for both increase in tax slabs and decline in tax rates is not possible at same time. If tax slabs are not increased then tax rates should be lowered and spread over a wider income base. Revised tax rates should be Rs. 0-5 lakh (5%), Rs. 5-10 lakh (10%), Rs. 10-15 lakh (15%), Rs. 15-20 lakh (20%), Rs. 20-25 lakh (25%), Rs. 25-30 lakh (30%), more than Rs. 30 lakh (35%).
9. The Modi government has disbanded the Planning Commission on the premise that the same policies and programs do not fit all states alike. By the same logic, how can the same deduction levels fit all income groups?
There is a need to think about deduction levels based on salary. A person who earns less, spends less on conveyance as he/she travels by public transport and hence needs comparatively lesser amount as deduction. A person who earns a decent salary and uses personal transport for commuting to office pays high fuel bills and hence needs a higher deduction. The same logic holds good for child education, medical reimbursement, etc.
10. The current income tax laws do not take into account the cost of living in different cities. House rent allowance is based on the logic that higher deduction is allowed for people living in metro cities. The same logic needs to be applied to the interest on housing loans as property is costlier in metro cities. Everything ranging from travel to medical expenses is high in metro cities. The government needs to divide cities into Tier I, II and III and devise exemption limits/caps for deductions depending upon cost of living index in these cities.
Like corporates and professionals, the salaried class should be allowed to claim all expenditure incurred in earning salary on actual basis without any caps. Is there any cap for a corporate or a professional on the amount of conveyance expenditure they can claim as deduction from their income? The answer is a big NO. So why should it be the same for the salaried class?
Ultimately, deductions/exemptions is the government's way of putting money in your left pocket and taking it out of your right pocket through income tax. Can we, as a society, move towards nil deductions/exemptions and tax on income at flat rates? This will reduce a lot of paperwork and hassles and lead to a much simpler/leaner tax code.
It is also important to add flexibility to the tax mechanism. The employee should be given a choice to choose from one of the methods described above, ie opt for tax deductions and tax slabs based assessment, or assessment based on cost of living index or go for assessment based on zero deductions.
Let's see what finance minister Arun Jaitley has in store for the honest tax paying section of the society.
(Suryakiran Tiwari aka Politicalbaaba runs a popular blog on Indian politics and elections. Politicalbaaba has been nominated by The Guardian as one of the online voices providing an alternative view on India and the general elections. Politicalbaaba also writes on social and economic issues.)