Since common man is directly affected by the income tax provisions every budget raises expectation levels of common man on this front. What the common man is expecting from finance minister this time? Let us discuss.
1. Rationalization of provision of taxation of short term capital gains on equity shares and equity oriented Mutual Funds
Presently short term capital gains on equity shares and equity oriented mutual funds units are taxed at flat rate of @ 15% where securities transaction tax (STT) has been paid. However the regular income of an Individual and HUF is taxed at rate which varies from 10% to 30%.
This provisions of 15% flat rate of tax were brought to provide boost for equity investment and to provide relief to investors. This has actually brought in effect ‘the law of unintended consequences”. For an individual who is in 10% slab rate has to pay tax on such short term capital gains @ 15% which was not intended by the legislator, I urge the finance minister to correct this anomaly.
2. Tax provisions on NPS withdrawals
The present tax laws exempt only 40% of the withdrawals and the NPS subscriber is required to purchase annuity to the extent of minimum 40% of the accumulated corpus in his NPS account. The balance 20% becomes taxable in the hand of the subscriber unless the subscriber decides to use 60% of the corpus for purchase of an annuity from an Insurance Company. Please mind that annuity as and when received becomes taxable so effectively only 40% of the corpus is tax free and the balance becomes taxable either immediately or in future.
Against this provisions of making only 40% of NPS corpus eligible for tax exemption at the time of withdrawal, the entire balance in employee provident fund (EPF) account is fully tax free. The government had attempted to bring in the provision to make 40% of the accumulated balance in EPF taxable last year which had to be withdrawn ultimately due to heavy protest from workers throughout the country. If the government can not make the EPF balance taxable to the extent of 40% and bring it on parity with NPS provision, the government should at least attempt to bring in parity by working other way round and make the entire accumulated balance in NPS at the time of withdrawal tax free and without there being any mandatory requirement to purchase annuity. Let the subscriber decide where he wants to invest his retirement corpus rather than the government imposing its wisdom on its citizen.
It may also be noted that the Section 10(12A) refers to an employee while giving the exemption of 40%. So it may happen that people who are not salaried and self employed at the time of withdrawal of the NPS money may not be able to avail the exemption of even the 40% which otherwise available to an employee. So this infirmity in the drafting of the provision needs to be removed so as to grant the benefit intended to non salaried tax payers.
3. Remove the limit of interest deduction for a house which is self occupied
The tax laws allow you benefit of interest on money borrowed for the purpose of purchase , construction, repairs renovation of any house property. However the amount of such claim is restricted to Rs. 2 lacs in case of one house which is self occupied. In respect of a let out property there is no restriction and full interest is allowable as deduction.
This provision of availability of full interest on let out house for tax benefit is used by the taxpayers in higher tax slab to minimize their tax liability due to difference between the taxable rentals on such house and interest payable on the home loans which is normally quite higher than the taxable rental income.
Rationally the income tax benefits of full interest should be made available to the genuine home buyers who need the house for their own residence and not for the people who use the same as investment and do tax arbitrage. The interest allowable in such cases should be restricted to the amount of taxable rent and any excess interest paid should be disallowed for income tax purpose. This ceiling of tax benefit available on let out property will help the government check speculation in real estate properties specially residential houses.
In case of loan for an under construction house where the construction is delayed beyond a period of five years, the interest deduction gets reduced to Rs. 30,000 for no fault of the tax payers. This unjust provision of reduced deduction should be removed altogether from the statute book to grant relief to the home buyers who are any way victim of the delaying tactics of the developers. It may be noted that the government has increased the period for completion of construction from three years to five years last year.
4. Revision in the monetary limit of deduction available under Section 80C, 80CCC and 80CCD
Presently as per Section 80 CCE the deductions available under Section 80C, 80CCC and 80 CCD(1) taken together are restricted to Rs. 1.50 lakhs per year. This limit of Rs. 1.50 lacs was revised from Rs. 1 lacs in 2014. The earlier limit of Rs. 1 lakh was fixed way back in 2003. It has been almost 14 years from the original limit of Rs. 1 lakh was fixed and has just been increased by 50% which works out to just 2.94% annually. This annual average increase has not even been equal to average inflation during the corresponding period. In my opinion this should be directly raised to Rs. 2.50 to give relief and make people to save money and avail tax benefits. We are a country of savers and the increased tax benefit will help divert the investment from physical assets to financial assets.
I am sure the Finance Minister lend his ear.
(The author is a CA, CS and CFP. Presently working as Company Secretary of Bombay Oxygen Corporation Limited. Views are personal., He can be reached at firstname.lastname@example.org and @jainbalwant)