Union Budget 2022-23: In addition to ELSS, debt and hybrid funds may also be included for deduction under Section 80C to encourage investors to invest in diversified funds
With a new wave of the pandemic hitting the country, the taxpayer’s expectations of the 2022 Union budget have increased significantly.
While on the one hand the government is taking steps to get the economy back on track, on the other it is equally important to relieve the common man to overcome the impact of this crisis.
The common man’s expectation revolves around reducing the tax burden and moving towards a more streamlined tax compliance and administration framework.
Some of the main expectations of the common man from this budget are:
1. Deduction of interest on the mortgage during the construction period
In accordance with the tax provisions in force, the interests of a real estate loan contracted during the construction of real estate are deductible in five equal installments from the year of completion of the said real estate. Many home buyers face a challenge due to this provision as they have to pay pre-EMI interest to banks/financial institutions each year, while the corresponding tax deduction is deferred to future years. This results in an excessive financial burden for homebuyers during the construction period and the burden is even longer if construction is delayed for any reason.
It is suggested that the deduction of interest payable during the construction period could be authorized in the same year of payment. Apart from financial relief, this would also promote ease of compliance since taxpayers would not have to keep records of interest paid for an extended period.
In addition to the above, to stimulate the real estate sector, a higher deduction for interest on housing loans is planned. Currently, the home buyer is eligible to claim a deduction of up to Rs 200,000 for interest payable during the year on a loan taken out for the purchase or construction of a detached house. This limit also includes pre-construction interest. This limit should be increased to give more tax benefits to taxpayers.
2. Increase in the amount of the deduction under section 80C
The Finance Act 2014 had increased the deduction threshold under Section 80 C of the Income Tax Act 1961 (the Act) from Rs 100,000 to Rs 150,000 with the aim of encouraging household savings. Given inflation on the one hand and the opening up of new possibilities for consumer spending on the other, the savings potential of households has been put to the test.
Currently, the deduction allowed under Section 80C covers a wide range of qualifying investments/expenses such as life insurance premium payment, employee’s contribution to provident fund, provident fund (PPF), National Pension Scheme (NPS), Housing Loan Principal Repayment, Equity Linked Savings Schemes (ELSS), etc.
A major expectation of individual taxpayers is to increase the limits of various investment/expenditure related deductions, under Section 80C of the Act to Rs 250,000, which will achieve the dual purpose of encouraging savings and lower taxes. This will ultimately leave more cash on hand which can also be channeled into expenses. Alternatively, the government may also consider introducing separate deduction limits for the principal repayment of home loans. This benefit would also help improve the housing market and be another step towards the government’s goal of affordable housing for the common man of this country.
In addition to ELSS, debt and hybrid funds may also be included for deduction under Section 80C to encourage investors to invest in diversified funds.
3. Increase the deduction limits on the health insurance premium
Section 80D provides a deduction in respect of the payment made for the health insurance premium for self, family and parents. In accordance with the provisions of Article 80D, a person can claim a deduction up to Rs 25,000 (Rs 50,000 in case of elderly person) for the health insurance premium paid for himself, his spouse and his family and similarly, a deduction of up to Rs 25,000 (Rs 50,000 for the elderly) for a premium paid for parents. Considering the increase in the rate of health insurance premiums over time and the increase in health expenses due to COVID-19 and other reasons, the current deduction limit should be increased by Rs 25,000 to Rs 50,000 (and from Rs 50,000 to Rs 1,00,000 for seniors). This move will also encourage more people to opt for health insurance policies and would also contribute to the growth of the insurance industry.
Fiscal expectations of salaried class taxpayers
1. Tax exemption for allowances and benefits related to working from home
The COVID-19 outbreak has introduced a new work-from-home regime for many salaried class taxpayers. In order to provide a better working environment for home employees, organizations provide their employees with certain facilities such as the provision of office equipment and furniture (printer, chairs, desks and other accessories, etc. ). Although such equipment/furniture is intended for the performance of a job, an item for personal use may be construed as being provided in the employee’s home. Therefore, it is expected that expenses incurred for such furniture and other home office setup costs will be specifically exempt from tax in the hands of employees.
2. Exemption from travel allowance (LTA) on an annual basis
LTA is the payment made by the employer to the employee for the expenses incurred while traveling on leave anywhere in India. Under current tax provisions, the LTA exemption is provided for two trips to India within a four-year period. The very first block of 4 years started in 1986 and covered the years up to 1989. These provisions were introduced decades ago and it is certainly time to revise them to provide higher benefits in terms of frequency of travel and coverage of eligible expenses.
Given the evolution of the standard of living and the increase in the purchasing power of taxpayers, it is suggested to provide for an LTA exemption on an annual basis. Also, in many situations, expenses related to staying in a hotel, food, etc. constitute an important part of the travel expenses and therefore the same could also be taken into account when calculating the LTA tax exemption. This proposal would also favor the tourism and hospitality sector which is one of the most affected sectors due to the pandemic.
3. Increase the limits of the standard deduction
In accordance with current limits, salaried employees are entitled to a lump sum deduction of Rs 50,000 on taxable wage income. The reason for this standard deduction is to cover many expenses incurred by employees during employment. However, this limit does not absorb all the expenses that an employee may incur during a year. We can also compare the case of an independent professional versus a salaried individual. Expenses such as fuel and vehicle maintenance, telephone and communication, books and periodicals, salaries of staff employed as drivers or other support staff, etc., are some of the expenses that are regularly incurred at the both by the employees and by themselves. – salaried professionals.
However, while the self-employed professional is eligible to claim all expenses incurred in the exercise of his profession, an employee is only entitled to a lump sum deduction of Rs 50,000. Therefore, the government should consider increase the standard deduction to at least Rs 1,00,000 or link it to the salary threshold, so that the deduction of expenses is on a fairer basis for individual taxpayers.
4. Increase the limit for other salary-related exemptions
Certain components of salary are eligible for deduction under Article 10 of the law, subject to limits decided long ago and which have practically become superfluous due to inflation. It is expected that the limits of various exemptions such as children’s education and accommodation expenses, etc. be increased taking into account the current inflation index.
5. Increasing tax brackets under the new personal income tax system
Most of the deductions and exemptions mentioned above are not applicable when an individual chooses the new personal income tax system introduced by the 2020 finance law. However, a large proportion of salaried individuals make investments and expenses which are covered by the old tax system, and opting for the new system is therefore disadvantageous. Therefore, if the government wants to encourage more individual taxpayers to opt for the new tax regime and simplify tax administration/compliance, tax brackets need to be further streamlined to make the new regime more beneficial.
The road ahead
In summary, considering the difficulty of taxpayers in the midst of the third wave of the pandemic, the Union budget 2022 is seen as a beacon of hope that can bring some kind of relief to taxpayers. Individual taxpayers across the country expect significant relief that can be incentivized in real monetary terms.
The author is partner – Grant Thornton Bharat LLP; with contributions from CA Pooja Lara, Principal, Grant Thornton Bharat LLP.
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