With the new Budget three days away, there are fresh hopes that the finance minister will continue tinkering with income tax laws, continuing what has been a consistent effort in recent years to simplify and rationalize them.
While P. Chidambaram and his team spent the weekend making sure all the facts and figures in the Budget were accurate, we took the time to take a close look at some provisions in the Income Tax Act that seem a bit out of touch with today’s economy, when it comes to personal finances.
We zeroed in on a dozen provisions that seem to irk a lot of taxpayers because these rules don’t seem to have kept pace with the swift pace of change in the Indian economy. This is by no means a prediction of what might happen in this year’s Budget. Rather, it is more of a wish list of common tax provisions that affect a large number of taxpayers and could do with a rethink.
1. An unrealistic provision under Section 64 of the Income Tax Act, makes it difficult for a husband to give a gift of money to his wife. Under the provisions of the Act, the income of the wife will be clubbed or added to the income of the husband. The law should be amended to permit some reasonable amount which can be given to the spouse without attracting attention under the provisions set out under Section 64.
2. Not a government employee? Do you know that the Income Tax Act treats you very differently when it comes to housing? Under Rule-3 of the Income Tax Rules, 1962, there exists a completely different set of tax treatments, especially with regard to the rentfree accommodation provided by an employer. While government employees pay a “licence fee” and are out of the tax net, non-government sector employees who receive rent-free accommodation end up getting hit with a hefty tax of between 15% and 20% of the salary, depending on the population of the city they live in. While such a tax may be meant to ensure that firms don’t structure compensation packages in such a way that employees aren’t paying taxes on key components, this is a glaring case of the Income Tax Act discriminating between government and non-government employees.
3. The whole area of rents seems to be one where people involved in drawing up our tax laws seem to be really out of touch with reality. For all types of taxpayers who do not have a house of their own or for employees who don’t get accommodation from the employer and get no house rent allowance, there is a special tax deduction on the rent paid by them for their house. The deduction is permissible under Section 80GG of the Income Tax Act and says one can enjoy a deduction for rent paid up to 25% of the annual income.
This sounds very reasonable, but before you start dreaming about moving up to a bigger rental, let us tell you about the catch. The 25% deduction has a cap. You can’t deduct more than Rs2, 000 per month. while this might seem like a lot of money if you are in a small town, it won’t get you much, if at all, in pretty much any city. This is a limit that has been on the books for many years and just hasn’t kept pace with the real estate realities in India.
4. The number of items on which the government collects a Fringe Benefit Tax (FBT) is mind-boggling, including some where it is difficult to imagine the rationale under which it falls under FBT in the first place.
One example: a sales conference attended only by dealers and not by employees is considered a fringe benefit as also are any nominal gifts or doodads given to dealers and distributors, and not to the employees.
One way is to prune the list of items that attract FBT. But a more radical idea perhaps would be to scrap FBT and impose 1%-2% extra tax. If nothing else, it will save taxpayers from the huge amounts of time they currently spend on figuring out their FBT.
5. According to income tax laws, taxpayers can save on capital gains by investing in capital gain bonds. As per the provisions of the law, contained in Section 54EC, there was no upper limit on such investments. Some believe the lack of a cap has helped many transactions, especially in real-estate deals, to be transparent. But, recently, the government amended the provisions of this law to put a cap of Rs50 lakh on investments in these capital gain bonds. Putting such a cap doesn’t make much sense and dropping it to go back to the original thinking that prevailed seems to be the smarter route for the government to take.
6. Senior citizens in India enjoy a tax exemption limit of Rs1,85,000 per annum. On the face of it, this is a very good tax break for the elderly, especially in comparison with that of the average, individual taxpayer. But the moment a senior citizen’s income goes over Rs1,85,000 per annum, the government swoops down with a 20% tax. This rate is on the high side and it would make sense to realign tax slabs to make sure that senior citizens aren’t forgoing a large share of their income as tax.
7. The finance minister has been good about increasing the initial income tax exemption limit every once in a while. But the larger question to ask is whether such a limit needs to be reflective of what it takes for a taxpayer to live in this day and age of rising prices and soaring real-estate costs. A doubling of the exemption to Rs2 lakh, which makes a lot of sense, might seem like a lot, but setting the exemption at an unrealistic and low figure is what fuels tax evasion. The reality is that whenever tax rates have been tinkered with and lowered, tax collections have typically gone up. But with tax rates being where they are, perhaps the easier way to help a large number of people would be to raise the exemption limit.
8. As many of you know, employers can give Leave Travel Assistance to employees in a tax-exempt manner as long as it is only twice in a four-year block of time. The other catch in this is that it covers travel to any part of India, under Section 10(5) of the Income Tax Act, 1961. This is a good benefit but in this day and age, why is the travel concession only granted to travel within India? Sure it helps to encourage Indians to explore all parts of India but perhaps it is time the rules are amended to let the same benefit apply to travel outside the country too.
The other problem with the whole leave travel rule is that it only exempts the value of travel and not the money spent on accommodation or food. If the idea is to encourage employees and their families to take a break, the deduction under Section 10(5) should not only cover the value of travel but also should extend to expenses on boarding and lodging.
9. Under current law, a salaried employee can enjoy an annual tax exemption in respect of medical expenses of up to Rs15,000. Given the soaring costs of health care, it would make sense for this limit to be increased in a big way, perhaps to Rs25,000 a year. That would bring it on par with rising inflation in the health-care area. Another odd feature of income tax exemption in the area of health care is the one that is granted in respect of medical expenses incurred on the employee for treatment abroad. But this deduction is available only when the gross income of the employee is up to Rs2 lakh per annum. This cap makes little sense and should perhaps be done away with. While this may be well intentioned, the reality is that in the majority of such cases, expenses on travel for medical purposes are sanctioned only in respect of senior employees. It would be difficult to find a company in India where the expenditure on foreign treatment is incurred for employees having a salary below Rs2 lakhs per annum. So this provision is relatively useless and ought to go.
10. Taxpayers currently enjoy a deduction of up to Rs1 lakh per annum under Section 80C for any tuition fees paid by them. But this deduction is limited just for fees. It doesn’t cover any other, equally relevant expenses, such as those for books and unforms, transport to school and back, boarding fees and many other expenses that are directly related to education. If the intention is to help parents who are investing in their children’s education, then it makes a lot of sense for the finance minister to permit all legitimate expenses to be eligible for deducted under Section 80C.
11. The loss of business is not allowed as a deduction against other income, especially in the case of salaried employees. In a country where there are many part-time entrepreneurs, one could argue that this provision makes little sense. Perhaps it ought to be amended to allow employees as well as directors of companies to adjust their tax payments on other income if they suffer business losses. After all, it isn’t the government’s responsibility to worry about moonlighting.
12. Wouldn’t it be rational if the time that a capital asset needs to be held to qualify for long-term capital gains, is the same for all categories of assets, whether these are shares or real estate or mutual funds? And what about extending the same to non-listed company shares? Currently, to save on capital gains, an individual taxpayer can invest in a residential property under Section 54 or Section 54F of the Income Tax Act, 1961. However, this benefit is available only for an investment in one residential house. It might also make some sense to amend the law and let taxpayers invest their capital gains in more than one house. It could help to a certain extent by encouraging more housing to come onto the market.
Our guest columnist is a veteran New Delhi-based tax and investment consultant as well as a television columnist on taxation
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