To Be or Not to Be: The Questions Indians are Asking Before Budget 2016

With Arun Jaitley’s third budget looming up ahead, a lot is expected from the Finance Minister in Budget 2016-17. The entire nation is sitting tight in anticipation as all eyes are set on February 29th.

Preeti Khurana, Editor-in-Chief at ClearTax, attempts to set our expectations right of what we can and should expect from Budget 2016. Below are some commonly faced dilemmas that we’ve tried addressing.

Will the Basic Exemption Limit be Raised or Not?

Taxpayers would definitely be very happy if the exemption limit is raised. But, we have to understand that the rising fiscal deficit is making it harder and harder for the FM to lower taxes.

With China’s economic troubles, falling currency, we are not immune to global challenges. In such a situation it may get harder and harder for the FM to raise exemption limit and put a pressure on tax collections.

Will there be an Increase in Deductions U/S 80C or Not?

Again, in these situations of a global turmoil, it may be beneficial to encourage people to save more. Having said that, the FM may direct attention at increasing 80C limits. Given that they have recently closed a 10 year NSC, they may also add some new & innovative Savings product.

Will they Link Basic Exemption Limit to Inflation or Not?

In real terms, the ‘value’ of the deduction or exemption is going down due to inflation. If these were also indexed like cost of purchase of assets is, these would be more in line with each year’s prices. This is also followed by IRS in the US, where the exemptions are indexed.

However, in India, usually the deductions are a result of calculations related to tax collections, which are related to the fiscal deficit number. Government’s tax collections targets are based on this number and although the thought is reasonable, it may be hard to expect the government to make this change, given pressures on the tax collections.

Also notable is that the indexation, may also result in change in tax slabs and rates each year.

Can they Raise Equity Allocation in Investment Planning?

RGESS is a failed scheme, which may be withdrawn and reviewed. A new scheme in turn may be launched. Capital gains exemption can be claimed on investing in capital gains bonds (section 54EC). With these, mutual funds may be added and this will attract taxpayers to the equity market.

Will they Implement Direct Taxes Code as a Tax Simplification Tool or Not?

Implementing the DTC will require a lot of political will and inclusion of dissenting thoughts. I think in this year, the FM’s focus is to first implement the GST (indirect taxes).

Also since DTC has been the handiwork of the previous government, the current govt may be wary of adopting it in its current form. Though the suggestions in DTC are useful.

Will they Incentivise and Promote NPS for Retirement Planning or Not?

Yes, absolutely. NPS needs this kind of push to make it attractive. NPS must be made EEE.

Can they Exempt Education Savings from Tax or Not?

Indian who are spending on expensive higher education, comprise primarily of the upper class, class that doesn’t particularly need the exemption.

The middle class are the ones who should and need to take the benefit of Section 80E, where interest payments on education loan can be claimed as a deduction without any limit. For them the number of years set in 80E (8 years) may be increased.

The poor, who cannot afford higher education, or take a loan, they need scholarships and assistance, more than exemptions. So in my opinion, we need to first identify the objective for this deduction before, raising the limit.

Will they Revise Certain Old Tax Exemptions or Not?

Exemptions like medical reimbursement, transport allowance, education allowance, house rent allowance and more were set keeping various groups in mind. One view may be to merge them and raise the exemption limits for all. This may be hard to do immediately and therefore, the government may consider revising some of these limits. True that some of these exemptions date back to the 90s.

Although, transport allowance was been revised in last year’s budget, HRA is also aligned to a person’s salary. 80GG may be considered for a revision. Self-employed individuals and those who do not get HRA can only claim a maximum deduction of Rs 2,000 a month under Section 80GG and this may be revised.

While medical expenses reimbursements are not revised, medical insurance limits have been revised. Under section 80D. This limit may be further enhanced.

Can they be Expected to Simplify Tax Rules or Not?

This year the govt is focussed on getting GST cleared in the parliament, hence it is highly unlikely that a lot will be done for direct taxes.

A lot has been done in terms of simplification of the filing of tax returns and credit is due to the government for these efforts. Some complex issues are present, such as tax benefits on home loans when there is a delay in projects. A lot of tax-payers are unsure about how interest income is taxed and these issues need to be resolved.

Do you have another question about the Budget that you’d like us to answer? Drop us a line below and we’ll try at best to respond and guide.

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