What individual taxpayers can expect from Budget 2020

Individual taxpayers are harbouring high hopes from Budget 2020, especially after the generous tax breaks extended to corporates in September 2019. Not many are willing to buy the argument that with a tight fiscal position, the Finance Minister’s hands may be tied. When the Centre can somehow spare money to help companies and businesses, why can’t it do so for individual taxpayers, goes the common refrain.

The last major tax benefits for individual taxpayers across the board were given way back in Budget 2014, with only tweaks here and there in the next six Budgets. While there have been attempts to provide some sweeteners, the tax breaks have been far fewer than expected. Here are some demands that individual taxpayers would like to see fulfilled coming Saturday, February 1, 2020.

Higher income slabs, lower tax rates

There is a clamour for revising upwards and rationalising the income slabs and tax rates that have stayed unchanged for quite some years now – tax-exempt up to ₹2.5 lakh, 5 per cent on taxable income between ₹2.5 lakh and 5 lakh, 20 per cent on taxable income between ₹5 lakh and ₹10 lakh, and 30 per cent on taxable income over ₹10 lakh.

For senior citizens (aged between 60 and 80), the tax-exempt limit is ₹3 lakh, while for super-senior citizens (aged 80 and above), it is ₹5 lakh; the other income slabs and tax rates are the same.

From Budget 2020, individual taxpayers seek a substantial increase in the tax-exempt limit from the current limits of ₹2.5 lakh/3 lakh/5 lakh. Also, there is a demand that the other income slabs be changed to provide relief to taxpayers. For instance, instead of a straight jump from 5 per cent tax to 20 per cent tax, there could be an intermediate income slab subject to 10 per cent tax.

Also, instead of having all income above ₹10 lakh in one slab, subject to the maximum 30 per cent tax, it could be broken up into two or more slabs subject to lower tax rates, and only incomes above a certain high threshold, say ₹25 lakh, subject to the maximum 30 per cent rate.

In the interim Budget 2019, individual taxpayers having annual taxable income of up to ₹5 lakh were given full tax rebate and thus spared from paying any income tax. But this rebate benefit did not apply to those whose taxable income exceeded ₹5 lakh even marginally.

So, for instance, if a person’s taxable income is ₹5.10 lakh, there is no rebate on income up to ₹5 lakh. The tax liability has to be calculated, without rebate benefit, on the entire ₹5.10 lakh as per the tax slabs. In short, merely because the income exceeded the ₹5 lakh limit by ₹10,000, an individual ended up paying more than ₹13,000 as taxes (including cess). It is hoped that in such cases, marginal relief – that limits the tax to excess income over the threshold – will be provided by Budget 2020.

Hike in Section 80 C limit

For many years, there has been much expectation that the annual investment/expenditure limit to claim tax deduction under section 80C — last increased from ₹1 lakh to ₹1.5 lakh in Budget 2014 — will get a leg-up. But such hopes have been repeatedly dashed in successive budgets from 2015 to 2019.

There is a clear case for a meaningful hike in the Section 80C limit, say to at least ₹2.5 lakh. One, it will incentivise household savings and investments; this is essential given the steady dip in savings rate in the country over the years. Next, a hike in the limit is essential to keep pace with consumer level inflation that has zoomed far ahead over the past many years.

Also, there is a crowding out of the Section 80C limit. With a plethora of avenues (investments such as EPF, PPF and ELSS, expenditure such as children’s tuition fees and home loan principal repayments, and insurance) allowed under Section 80C, the limit of ₹1.5 lakh is exhausted very quickly for many individuals. To address this problem, a hike in the limit is necessary.

If it is reluctant to provide an omnibus hike across avenues due to revenue considerations, the Centre can also consider targeted increases in the Section 80C limit — similar to the additional annual ₹50,000 deduction for the National Pension System (NPS) in Budget 2015, over and above Section 80C.

For instance, it can provide additional tax breaks for investments in infrastructure bonds. Another option, from revenue considerations, could be to provide the benefit of the hike in the Section 80C limit only to those in the low- and mid-income categories.

For individuals, tax-breaks should ideally not be the sole reason to save, invest, and get essential pure life cover. But given the ground realities, a nudge or even a push is in order to build a holistic financial plan and corpus.

Increase in other tax breaks and allowances

Similarly, individual taxpayers hope for an increase in the deduction limits under Section 80D for health insurance premiums (from ₹25,000 a year for those under 60 and ₹50,000 a year for senior citizens). There is also a clear case for inflation-adjusted hikes in other allowances such as children’s education allowance (just ₹100 per month). These small limits had been set many years ago and call for a substantial increase.

More NPS and pension plan reforms

Over the years, the Centre has been regularly announcing measures to make the NPS – Tier 1 more attractive to investors. This includes an addition tax break of ₹50,000 a year beyond Section 80C, and allowing tax-free withdrawal of 60 per cent of the corpus on maturity. But more needs to be done to draw more investors into this useful retirement scheme. One, the compulsion to purchase annuities (low-return instruments) using 40 per cent of the corpus on maturity needs to be done away with. It must be left to an investor to decide how she wants to use her money.

Full withdrawal of the entire corpus should be allowed, tax-free, similar to the Employees Provident Fund (EPF) scheme. Besides, genuine, long-term pension plans offered by other private players should also be allowed tax breaks similar to NPS, to increase pension penetration in the country.

Also, NPS – Tier II, a low-cost, effective investment option, should be given a fillip, by treating it at par with mutual funds for tax purposes.

While gains on mutual funds (both debt and equity) enjoy tax concessions, especially if held long-term, there is no such benefit on NPS – Tier II gains that are taxed at slab rates. Also, some ambiguities regarding the tax treatment of NPS – Tier II need to be cleared. For instance, a.) whether the entire withdrawal or the gains alone are taxed, and b.) the basis of cost computation in case of partial sale of investments.

No tax on plan changes in Mutual Funds

There is a need to remove from the tax purview, changes in plans undertaken by investors in their mutual fund schemes. Investors in mutual funds can change their scheme plans - for instance, from a regular plan (where the investment is made through a distributor) to a direct plan (where the investment is made directly) to reduce costs and improve returns. Or from a scheme’s dividend plan to its growth plan for tax-efficient returns.

However, such changes in plans are considered transfers, and gains are taxed though they are still unrealised.

This is unfair, and such gains on mere transfers should not be taxed, given that the investment continues in the mutual fund. In insurance plans, transfers from one plan to another are not taxed; the benefit should be extended to mutual funds.

Increase in limit on loss from house property

Contrary to expectations of tax sops, Budget 2017 delivered an unkind cut to property investors by restricting the overall loss from house property to ₹2 lakh a year, and the remaining loss only allowed to carried forward for 8 years. This has dampened sentiments further in an already weak housing market.

Investors hope that Budget 2020 will do away with this limit, or at least increase it substantially. The logic is that in the initial years of a big-ticket home loan, interest payments can be significantly higher than the limit of ₹2 lakh, and it may not be possible to set-off accumulated amounts within 8 years.

Rationalisation of holding periods and tax rates on investments

At present, there are a lot of differences in the tax treatment across, and within, asset classes such as equities, debt, mutual funds, real estate and gold. Different holding periods to qualify for concessional tax treatment, different tax rates on gains, different indexation (readjustment of cost to adjust for inflation) rules, different tax breaks and more — it’s a complex regime often devoid of logic and fairness.

This is troublesome for ordinary investors, and could result in sub-optimal investment choices. It is hoped that Budget 2020 will bring about the much-needed simplicity, consistency and fairness.

Moderation of surcharge on the super-rich

The July 2019 Budget increased sharply the tax surcharge on high-income earners. For individuals whose taxable income is more than ₹2 crore and up to ₹5 crore, the surcharge on tax was increased from 15 per cent to 25 per cent. And for those whose taxable income is more than ₹5 crore, the surcharge was increased from 15 per cent to 37 per cent.

With this, the effective tax rate went up to 39 per cent for those in the ₹2 crore – ₹5 crore taxable income bracket, and to 42.74 per cent for with taxable income over ₹5 crore. That’s an increase of about 3 percentage points and 7 percentage points respectively from the earlier effective tax rate of 35.88 per cent.

While there was a partial withdrawal of the higher surcharge on some capital gains, the higher surcharge continues on the majority of the income of the high-income earners. Moderation of the higher surcharge can give a boost to consumption in the economy, something that is sorely needed at this juncture.

Dividend distribution tax removal

There is hope that dividend distribution tax (DDT) payable by companies that declare dividends will be done away with. The argument for this demand is that DDT amounts to double or triple taxation in the hands of investors, since the dividends are paid out of the post-tax profits of the company, which in the first place, is owned by the shareholder investors. So, when tax has already been paid on the profit (effectively by shareholders), why tax the same profit again when it is distributed as dividends?