Home >Money >Personal Finance >Small relief in the budget can go a long way in helping taxpayers

A significant part of the annual Union budget is a balancing act. The government raises taxes in some areas and offers relief in others. The balancing act is accompanied by rationalization. That’s what the government did when it first introduced a standard deduction of 40,000 in Budget 2018-19 and increased the limit in the next one by 10,000.

With the covid-19 pandemic affecting individuals, tax experts said that hiking the standard deduction limit further could help them. They also feel that there’s an urgent need to re-introduce infrastructure bonds. These bonds were brought in about a decade ago but were discontinued the following year.

“In the wake of the pandemic, which has affected individual’s earning capabilities, focusing on these two aspects can bring in relief for taxpayers," said Divya Baweja, partner, Deloitte India.

Let’s look at how standard deduction helped in the rationalization of taxes and why infrastructure bonds, which could partially fund the country’s infra needs, shouldn’t have been discontinued.

Standard deduction

The government replaced the medical and transport allowance with the standard deduction in the 2018-19 Budget. Before the standard deduction, an individual could get 19,200 tax deduction under transport allowance and 15,000 under medical allowance. The total came to 34,200.

In the 2018-19 Budget, the government introduced a standard deduction of 40,000 and did away with transport and medical allowance. It was further increased to 50,000 in the following Budget.

In terms of savings, the impact may not look significant. However, to avail of the medical and transport allowance, a salaried person had to submit bills and there was administrative effort on the part of the employees as well as the employers, which was time-consuming.

Many tax experts felt that the government could further hike the limit. “It has been a challenging year for everyone, including the government as well as taxpayers. The government is struggling with poor tax collection and its commitment towards maintaining the fiscal deficit target. It has to take care of the vaccination program across the country. Not sure how the finance ministry will balance any tax relief with such challenges," said Preeti Khurana, a tax expert, and spokesperson of ClearTax.

“Standard deduction, however, could be an excellent way of offering tax relief to people with job losses. Many have not got increments or have faced salary cuts. Many spent money on setting up their home office. A hike in standard deduction could be a one-time covid-19 tax relief that the government could think of this year," she added.

Naveen Wadhwa, deputy general manager, Taxmann, a research and advisory firm, agreed. “The government can use it to reward salaried taxpayers. Hiking the limit will leave more money in the hands of the taxpayers, which can help boost consumption," he said.

Infrastructure bonds

Infrastructure bonds were introduced in the 2010 Budget. A 20,000 deduction was available to individuals for investing in notified long-term infrastructure bonds from 1 April 2011, under Section 80CCF. It was in addition to the other tax deductions available under Sections like 80C, 80CC, and 80CCD. The deduction was available only for one year. The government discontinued it from financial year 2012-13.

“The bonds served as a way to bridge the funding gap in the infrastructure sector, which plays a key role in the country’s economic development. The government should have continued offering them," said Baweja.

According to tax experts, infrastructure bonds could aid economic growth. The re-introduction of infrastructure bonds is the demand that comes up before every budget. However, this time, there’s pressure on the government to start investing in the infrastructure sector, which will help create jobs and give the economy the right kind of push.

“It will not only help the government to raise funds for infra projects but also lead to increase in investments by individual taxpayers in productive assets rather than parking the money in unproductive assets," said Baweja.

Tax experts suggested that if the government doesn’t have the room to offer it as an additional deduction, infra bonds could be introduced as part of Section 80C.

According to Wadhwa, an alternative to the infra bonds could be allowing state-owned infrastructure companies to raise money through tax-free bonds. “In the current low-interest rate environment, investors are looking at better post-tax returns to beat inflation. Allowing public sector infra units to raise money via tax-free bonds can help individual taxpayers as well as mobilize funds for development," he said.

Changing the standard deduction limit and re-introducing infra bonds can help take some burden off individual taxpayers.

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