2020 has been a difficult year for the government as well as taxpayers. The loss of income, disrupted business activity, eroded consumption & industry growth are just a few mentions in the long lists of evils caused by COVID19 pandemic & subsequent lockdowns. We hope that Union Budget 2021 will be successful in gearing up growth wheel in the economy. At the same time, the common man seeks respite in direct taxes, and save slightly more in the pocket.
A tax payer has a wish list for FM N Sitharaman as she prepares to present Union Budget 2021 on February. Let’s walk through.
Section 80C of the Income-tax Act, 1961 is a white swan tax blanket for all taxpayers. However, it is cluttered and needs to be extended to truly relieve households financially. It covers tax exemptions for investing in PPF, EPF, life insurance premiums, children’s tuition fees, repayment of housing loan, and other tax saving investment options, for total of up to Rs 1.5 lakh. The limit of 80 C was last updated in 2014-15. Owing to rising inflation, increased cost of education & persistent need for life insurance & tax saving investments, the overall relief u/s 80 C should be updated to Rs 2.5 Lakh in the budget 2021.
Adequate life and health insurance covers are necessary for everyone in the household. Particularly for working members it is important to buy pure life cover for at least 10X annual income. Till pandemic rocked us, we largely remained a nation of under insured. People preferred to buy life covers protecting principal amount and the ones that were offering assured returns, thereby missing on to the importance of financial security of family in case of death.
The need for Term Plan in the Portfolio is a real one and thus government should encourage and incentivise people buying insurance. The separate provision for the same will certainly encourage people to update their portfolio and purchase financial security against vulnerability of human life
Home Loan- There are series of tax benefits Home Loan borrowers seek.
Currently, all Home Loan borrowers are eligible to claim deduction up to Rs 2 lakh for interest repayment under Section 24B of Income Tax Act. The Home Loan is a high-ticket long term loan. The first few years of a Home Loan comprise larger interest than principal component. The Rs 2 Lakh deduction thus remains largely insufficient for bearing the interest cost of even Rs 50 Lakh Home Loan. Thus, government should reset the limit of tax benefits u/s 24 B and expand this limit by at least 1 Lakh.
Alternatively, government can consider increasing overall deduction of at least Rs 5 Lakh on repayment of principal & interest on Home Loan. This will encourage purchase of homes and cut down the humungous unsold real estate inventory at a greater pace, thereby derive the growth & help revive the economy post COVID.
In Budget 2019, FM has announced an additional deduction of up to Rs 1.5 Lakh u/s 80EEA for first time home buyers of affordable units. This was offered over and above the existing benefits under section 24B. Herein, two updates are required. First, the benefits should be offered to a larger base of customers and not only to first time affordable housing segment. Second, the capping of relief for loans up to Rs 45 lakh unit should be revised to at least Rs 75 lakh, parallel to current property prices in the metro cities.
2020 has strongly reiterated significance of Health Insurance. It is important to purchase health insurance of Rs 10 Lakh for a family of 4– 2 adults & 2 minors. The current capping of Rs 25000 for self and family is inhibiting and should be enhanced to Rs 75000 so that larger insurance policies could be incentivised for actual needs.
There is a need to bring uniformity in the way different investments are taxed. For instance, gains from stocks and equity funds held for a year are termed as Long Term Capital Gains (LTCG). In the case of real estate, the holding period is 2 years, for gold funds & debt funds, it is 3 years.
Tax treatment is different in the same asset classes. LTCG from gold ornaments, bars, coins and gold funds are taxed at 20 % with indexation, while gold bonds are tax free if held till maturity. In case sold before maturity, the tax is only 10 % without indexation.
Thus, it is important that FM looks at this aspect and removes these gaps. These complications should be rationalised for efficient compliance.
Another small, yet far reaching step should be to ease the financial stress of people working from home. The government should offer some kind of tax deduction or benefit to people who have incurred additional expenses during lockdown and even now. In many cases, the travel allowance has been deducted without any reimbursement for additional internet, electricity and other miscellaneous expenses that people are bearing to WFH.
Until now, max companies had set basic salary as 35-45% of the total compensation paid, which will now be calculated as minimum of 50% of the wage. Gratuity is calculated on basic pay. Thus, owing to revision in recent amendments, gratuity payout to employees will increase substantially for most companies. Thus, companies expect the larger base for gratuity exemption from this FY, i.e from existing Rs 20 lakh to Rs 25 lakh.
The pandemic was a dual edged sword of financial & medical crisis. It is vastly assumed that FM may introduce, a COVID cess just like Swachch Bharat Cess and education Cess for tax payers this year. Herein, we hope any such additional levy should only be applied on highest tax paying bracket. People earning below 10 Lakh should not be asked to pay COVID Cess further. For, WFM a host of expenses have already been stressed on people’s pocket.