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Budget unlikely to tinker with the tax exemption limit
February, 16th 2010

The Budget is round the corner. Its again that time of the year when expectations get built up for lollies that would be doled out.

The salaried class is dreaming of the restoration of standard deduction. However, I dont think it will come back. This was not available to other categories and thereby lay the anomaly. There is an argument that businesses can set off expenses. But their earnings, which is their incomes, is what is left after expenses.

Hence there is no difference between income earned through salary and income earned through business. One could argue that businesses set off more expenses than they incur.But that is illegal. The laws cannot be framed assuming that one section of the people will be potentially dishonest and hence should be taxed higher. The law should instead be fair and should be enforced in letter & spirit. That probably was why it was removed - to bring in equity. And it would possibly stay that way.

The salaried class may be cross with this. But there is probably a better chance of a raise in the basic exemption limit from Rs 1.6 lakh to Rs 1.8 lakh or even Rs 2 lakh. That is good news. There will be corresponding changes in the limit for the fairer sex and senior citizens. But this will not be enough of an incentive to pacify this constituency for the basic inflation is in double digits.

People are expecting possibly a big hike in the light of the proposed slabs in the Direct Tax Code (DTC). They may be disappointed. The government is running huge deficits. Hence any changes will be in the periphery for now.

Then what about the increase in limits of Sec 80C? I would expect that the government may do something here. What form it could take is difficult to fathom. Again DTC raises expectation with the savings possibility of Rs 3 lakh under Sec 66 of the DTC. But, expect minor changes in the current Sec 80C, if at all. The overall limit could be raised a bit to say Rs 1.2 lakh, even Rs 1.5 lakh. Or, it could be some relief outside the purview of the current Sec 80C, like a deduction for pension plans outside 80C or for that matter for infrastructure bonds.

What about the benefits under Sec 80D? Not much is expected here. Also, most are finding it difficult to even exhaust these limits.

Will there be increases in the limits of items like conveyance, which is currently exempt from tax to the extent of Rs 800 per month (p.m). There could be some relief here, but expect just a small increase to, say, Rs 1,200 p.m. Medical reimbursement limits may just stay put at Rs 15,000 p.a.

What about the interest component of the home loan? There is a soft corner for home buyers and they may find this Budget friendly. There could be a raise in exemption limits for interest from Rs 1.5 lakh to say Rs 2-2.5 lakh. This may be a prelude to kick off the withdrawal of the stimulus as a sop like this could be expected to prop up the property mart and keep the momentum going, despite withdrawal of stimulus. Since real estate sector has deep linkages to scores of sectors, it may make sense to prop it up. Increasing the limits here would hence be a master stroke. I will be surprised if the finance minister does not raise the limit here.

Lets look at what one could be done in the Budget for some broad categories

The medical exemption available today is Rs 15,000 p.a. This is pretty low given that this amount is for any consultations, medicines & minor conditions and emergencies that could occur.
Decrease in customs duty and exemption from excise duty and countervailing duty on nine specified life saving drugs. In view of the escalating medical costs, duties & levies pertaining to more drugs, equipment & products impacting a large segment of the public should be brought down.

The government is allocating resources towards many programs like National Rural Health Mission (NRHM) & Rashtriya Swasthya Bima Yojana (RSBY). Allocations in such government programs are leaky and benefits are not commensurate with the amounts allocated. It would be a great idea to promote private enterprise in taking healthcare to the masses. Tax & duty concessions for setting up a hospital, health centre or dispensary in a rural/ semi urban area could be an option. Another would be to make it mandatory for major hospitals in Class A cities to have branches in mofussal areas in their region (say within 150 kms radius area).

Just like a pension fund, a health fund can also be started. For instance, mutual funds can launch products which invest money in equity / debt markets and allow the investor to use the amount only in case of medical emergencies. This fund can again be allowed exemptions under Section 80D. Such products already exist as health insurance products in the form of Ulips. MFs and other forms of such products can be formulated to offer choice & diversity.

Retirement income comes at the end of ones working life. It is a good idea to tax that at a special rate (say 10% or the marginal tax rate, whichever is lower), than subject them to the applicable slab rates. This will encourage more long-term savings through such plans.

Governments professed intention is to provide shelter for all. In line with this and in view of the huge escalation in the cost of housing, the finance minister should consider giving full exemption to the interest component of the loan, in a year, much like it is done in for education loans.

Rent paid by an individual is now subject to the one-in-three formula. It can be simplified to just one standard figure, which could be say 3% of the average price in an area.

For instance, the approved rates forsay Andheri (a suburb of Mumbai ) is between Rs 7,000 - Rs 15,000 psf, then the average comes to Rs 11,000 psf. For a 1000 sq ft area home, the rental for a year would come to Rs 3.3 lakh. Any other formula which is simple to understand and adhere should be fine too.

Personal taxation
In view of the rise in cost of living and the inflation in primary products, the basic exemption limit could be increased to Rs 2 lakh. Also, the income tax slabs of 10% could be stretched to say Rs 5 lakh, 20% slab for Rs 5-10 lakh and 30% beyond that. This could be an interim measure before DTC, which anyway proposes much wider slabs, where 30% slab starts only beyond Rs 25 lakh.
Infrastructure development

Products specifically aimed at collecting & channelising funds for infrastructure development in the country could be introduced. This product can be of long duration and can allow people to invest and save tax. Another Rs 1 lakh exemption could specifically be given to a special category.

Education costs are galloping and many find it onerous. A special incentive to alleviate the strain will go a long way in helping parents educate their wards in relative comfort. The exemption of Rs 12,000 pa could be enhanced to Rs 20,000 p.a (for up to two school going children) and the same can be over and above the Sec 80C limit of Rs 1 lakh. For parents who have college going children, the limit can be double this.

Schools operating in Class A & Class B cities can be made to compulsorily open branches within a 150 km radius, in a mofussil area. This will augment availability of good quality education institutions and the spread of education.

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