After the surprise cut in corporate tax rates in September, many tax experts expect the government to tweak income tax rates and deduction to bring some relief for the common man. But don’t expect much given the fiscal constraints of the government, caution experts. “A cut in personal income tax rates won’t be easy when the exchequer is already reeling under the impact of revenue foregone due to the corporate tax rate cut. The government will have to strike a balance between the expectations of taxpayers and the resources at its disposal,” said Gaurav Mohan, CEO of AMRG & Associates.
Income tax changes: Here some expectations from Union Budget 2020
1) Some tax experts expect a rejig in basic income tax rates or tax slabs given the steep rise in rates to 20% in the ₹5-10 lakh income slab, from 5% in the preceding slab. “This may be accompanied by a new slab for ₹10-20 lakh as the 20% tax rate above ₹5 lakh seems to be a steep increase over the immediately preceding 5% rate. If this happens, the 10% tax rate could be re-introduced for the ₹5-10 lakh income slab,” says Alok Agrawal, a partner with Deloitte India.
2) Some tax experts expect a tweak in long term capital gains tax on equities. In 2018, the government had re-introduced long-term capital gains tax on gains arising from the transfer of listed equity shares exceeding ₹1 lakh at 10%, without allowing any indexation benefit (subject to grandfathering benefit for appreciation up to 31st January 2018).
“This limit of ₹1 lakh is too low as many individuals are holding equity mutual fund investments for many years. To continue incentivising retail investments into equity MFs, the government could consider increasing the limit of ₹1 lakh to ₹2 lakh for holding beyond, say, two years,” said Alok Agrawal of Deloitte India.
3) Last year, the government had provided additional deduction for interest payments up to ₹1.5 lakh for first-time homebuyers under the affordable housing segment for house value up to ₹45 lakh. However, middle-income group taxpayers, even in Tier-2 cities, may not qualify for such a deduction owing to higher housing costs, say tax experts. With rapid urbanisation in India, the limit on housing value should be enhanced so more Indians can avail of this deduction, say experts.
4) A popular avenue for channeling household savings through income tax provisions has been the deduction under Section 80C which is currently limited to ₹1.5 lakh per annum. However, over the years, the scope of this deduction has become too wide as compared to its very modest limit, say experts. “We do foresee some relief for personal income in lower tax slabs, with minimal impact on the exchequer. The biggest relief may come in the form of extending limits on Section 80C benefits,” said Amar Ambani, senior president and research head for institutional equities at Yes Securities.
5) Alternatively, the government should carve out a separate deduction for expenses allowed under Section 80C such as children’s tuition fees, life insurance premium and housing loan principal payments as compared to the investment-oriented items in that scope, says Saraswathi Kasturirangan, partner with Deloitte India.
6) Tax experts feel that NPS scheme needs further boost through more tax incentives. According to reports, PDRDA, the regulator for NPS, has sought an increase in the additional deduction limit from ₹50,000 to ₹1 lakh.
7) In case your employer is also contributing towards your NPS account, an additional deduction of up to 10% of salary (basic + DA) irrespective of any limit qualifies for income tax deduction under Section 80 CCD(2). While this limit has been increased to 14% of salary for central government employees, it remains at 10% for others. According to reports, PFRDA has urged the government to extend the facility of tax-free contribution of 14% to all categories of subscribers.
8) Some tax experts expect the government to announce some tweak in dividend distribution tax (DDT). “Withdrawal of the DDT will remove the cascading impact of taxation. Government should tax dividends in the hands of the shareholders at concessional rates,” says Ashok Shah, partner at NA Shah Associates LLP. Currently, a company pays income tax on its taxable profit. Thereafter, when it distributes the surplus profit to shareholders it needs to pay DDT at 20.56%. Further, tax payers also needs to pay additional tax at 10% (plus applicable surcharge and cess) on dividend above ₹10 lakh.
9) Some tax experts say that the government should either abolish STT (Securities Transaction Tax) on listed securities or should exempt long term capital gain on sale of listed securities from tax. Tax on long term capital gains (LTCG) on listed securities and Securities Transaction Tax (STT) amounts to double taxation, say tax experts.
“STT was introduced in 2004 and accordingly long term capital gain on which SST is paid was exempted from tax. In the Union budget of 2018, tax on long term capital gains on listed securities was reintroduced. At the same time, STT was also continued. This had negative effects on sentiments of investors,” says Ashok Shah of NA Shah Associates.
10) Due to income tax levied on interest income, fixed income investments do not provide much benefit to investors, says Saraswathi Kasturirangan, partner with Deloitte India.
“Currently, there is no deduction for interest income from fixed deposits. The deduction for savings account of ₹10,000 is very low. This limit was increased to ₹50,000 for senior citizens. Extending the deduction to fixed deposit interest as well as enhancing the quantum to ₹50,000 across the board is also on the wish list.”