A Budget prior to an election year is generally looked at with anticipation, expecting generous income-tax concessions, particularly for the salaried class. Although it appears unlikely that there would be liberal concessions for this class this time around, as one would not like to rock a boat that is cruising, certain areas of taxation for the salaried class do merit a change.
HRA, housing loan
At present, the deduction for House Rent Allowance (HRA) is the lower of 50/40 per cent of salary depending on the city, HRA received or the excess of rent over 10 per cent of salary. Considering the way salary structures are devised in India, the excess of rent over 10 per cent of salary would be the exempted amount.
Although there is a boom in the housing industry, house rents have skyrocketed but the exemption percentages have been unchanged for sometime now. Rent constitutes a major outflow for the salaried who does not own a house, and he/she would not be overly ambitious in seeking an increase in the limit.
The argument that 50 per cent of the salary gets an exemption could be negated by pointing out that the percentage is on the basic salary, which does not increase proportionately every year. Restricting HRA to the excess of rent over 10 per cent of salary acts as a limitation to claim the maximum deduction this clause is best removed. The limit for the interest on housing loans was fixed at Rs 1,50,000 from the assessment year (AY) 2002-03. This warrants an increase as the cost of housing loans has gone up.
For the salaried taxpayer, standard deduction came as a relief. The deduction was given for providing a tax break for incidental expenses incurred, such as conveyance or fuel. Over the last few years, this had been in and out of the tax laws before being finally removed from AY 2006-07, thereby closing the last window available for the salary earner to save some tax.
In the period September 2000 to April 2006, there has been an 87 per cent increase in petrol prices, with no tax breaks. If you add to this the fact that the salaried man has got to pay more for other services owing to the increase in service tax, the case for reintroducing a relief on the lines of standard deduction becomes stronger.
A professional who has his own practice is able to claim the extra service taxes he pays as a deduction while a professional who is in service is not able, which brings into fore the concept of equity in taxation and its non-applicability.
The provisions governing taxation of salaries have a few attractive but measly deductions, such as free education (Rs 100 per month per child with a restriction to two children), hostel expenditure (Rs 300 per month per child with a restriction to two children), transport allowance (Rs 800 per month), and so on. These are not in tune with market rates. In case the transport allowance is marked-to-market, the deduction could well be around Rs 2,000. Education costs are nowhere near the exemptions being given, which calls for their revision or abolition.
If the mantra that simpler tax laws increase collection and reduce litigation holds true, a relook at the clauses taxing salaries is a sine qua non.
Mohan R. Lavi (The author is a Hyderabad-based chartered accountant.)