Budget 2018: Given the challenges the economy has encountered post demonetization and GST implementation, the Union Budget may bring about many beneficial reforms in terms of tax reductions and many other measures.
Budget 2018: After the unprecedented Union Budget 2017, which not only incorporated the Railway Budget for the first time but was also presented after the historic demonetization announcement, the Budget 2018 is expected to be a breakout budget. This is primarily because this will be the first budget after GST implementation and will also be the Modi government’s last full-fledged budget presentation before the 2019 Lok Sabha polls. The latter makes this a decisive announcement for the Narendra Modi government, to convince the citizens of India to consider the Narendra Modi government for another five-year term. Given the challenges the economy has encountered post demonetization and GST implementation, we expect this budget to bring about many beneficial reforms in terms of tax reductions and many other measures. We take a deeper look at people’s expectations.
Tax exemption limit to be hiked?
Middle income groups are eagerly awaiting and hoping for a big relief in the Budget 2018. The middle class, especially the salaried class, is under pressure courtesy retail inflation which has been steadily increasing. It is expected that the Finance Minister may hike the personal tax exemption limit and tweak the tax slabs thereby enabling people to have more money in their pockets. In the last Budget, Finance Minister Arun Jaitley left the slabs unchanged but to help small tax payers, the base rate was reduced from 10% to 5% for individuals having annual income between Rs 2.5 lakh and Rs 5 lakh.
Since the effects of demonetization are still being felt around the country and may continue for a few more months, there is a pressing need to boost demand. One way to do this would be to consider the revision of the income tax slabs. This will help in improving the purchasing power and create additional demand. In this regard, the Union Budget could hike the tax exemption limit from the existing Rs 2.5 lakh to at least Rs 3 lakh. It might also lower the tax rate for different tax brackets, especially for incomes between Rs 5 lakh and Rs 10 lakh.
Watch Video: Will Tax Slabs Be Revised In Budget 2018?
Limit under Section 80C to be raised to Rs 2 lakh
Currently, a maximum deduction of Rs 1.5 lakh is allowed to all individual taxpayers for investing in various tax-saving schemes, such as EPF, PPF, life insurance schemes, NSC, ELSS, etc. under Section 80C. An additional deduction of up to Rs 50,000 is also allowed for investments in the National Pension Scheme (NPS) under section 80CCD (1B). Considering the current macro-economic environment and consequently, the need for higher savings, it is expected that the Budget 2018 could raise the standard deduction limit from Rs. 1.5 lakh to Rs 2 lakh.
Increase in monetary limit for medical reimbursements, transport allowances
It is also expected that the limits for certain tax-free reimbursements/ allowances to salaried taxpayers such as Rs 15,000 per annum for medical reimbursements, Rs 1,600 for transport allowance, etc. may be increased to meet the increased cost of medical and transportation.
Increasing limit for investment of capital gains under Section 54EC
The options for investment of long-term capital gains for availing tax deduction under Section 54EC are limited to capital gain bonds issued by NHAI and REC or any other notified bonds. An addition of mutual funds into the basket of eligible investments with a lock-in period of 3 to 5 years would channel money from real estate back into the capital markets. Moreover, the Finance Minister could also consider increasing the current limit of Rs 50 lakh to Rs 1 crore, considering a spurt in the property prices and resulting capital gains. Further providing push to the infrastructure sector, this would also help the government in mobilizing resources at lesser costs.
Allow LTCG exemption on equities to continue
With lower-than-expected GST collections, the Finance Minister may attempt to boost revenue by other means. One of them could be taxing long term gains from equity markets which currently enjoy 100% tax exemption for investments more than 1 year. This could be a big dampener for the middle class that is finally waking up to the benefits of investing in equity over long term through Mutual Funds via the SIP mode. Post demonetization, a large amount of money has gone into the equity markets. So investors will hope that Finance Minister Arun Jaitley will allow LTCG exemption on equities.
Rekindle the NPS
Unlike the PPFs and the EPFs which are exempt at the time of withdrawal, NPS withdrawal is taxable. For NPS withdrawal at retirement, 40% of the accumulated amount must be compulsorily used to buy an annuity plan. Out of the remaining 60% accumulated amounts, 40% is tax-free, but 20% is added to the taxable salary and taxed in the year of withdrawal as per the individual’s tax bracket.
Apart from that, the NPS can be also considered as a product which gives better retirement benefits as 75% of the corpus can be invested in equities which has recorded returns of about 10 to 15% in the past few years. Further, NPS is one such product which can help taxpayers invest for retirement regularly and diligently. This money is allowed to be invested in equity to match the risk profile of an investor. To render NPS more attractive, the government might consider allowing a higher corpus withdrawal without any or minimal tax implications.
In conclusion, rising prices and stagnant income levels have unnerved most individuals – the former can be attributed to a function of demand and supply fluctuations as well as the monetary policy adopted by the government. By ensuring prudent fiscal spending as well as attractive tax benefits to both individuals as well as corporates to increase income levels, the government should go the extra mile to provide relief to the common man.
(By Dasvir Ankhi, Head-Wealth Management, Distribution and Advisory, Tata Capital)