Budget 2018: Union Budget 2018 is round the corner. The focus of the government is on developing infrastructure, real estate, digitisation, education, re-skilling manpower, among others. Employment-generation measures and the social sector are expected to see preferential allocations. In light of the above, the government could consider rationalising some of the investment avenues: First, section 80C provides a deduction for payment towards LIC premium, EPF, investment in PPF, investment in NSC, repayment of principal component of housing loan, investment in post office time deposit scheme, senior citizens saving scheme, payment of tuition fees, etc. In order to channelise savings into sectors that are of prime importance for the development of the economy, the government may consider providing focused reliefs by introducing separate limits for investment in bonds/mutual funds/equity investments. Similarly, separate limits may be prescribed for payment towards tuition fees for children and for re-skilling.
Further, the maximum deduction, which can be availed by a taxpayer, is restricted to Rs 150,000, a limit that was fixed way back in FY15. With rising inflation and slowing down of the economy, it is necessary that the government considers enhancing this limit. Second, the low-cost, market-linked National Pension System (NPS) has been given an aggressive push by the government so as to create a pensioned society. Currently, it comes under the EET (exempt, exempt, tax) regime. Withdrawals from the NPS are taxable to the extent of 60%, hence, the common man still prefers other retirement avenues, such as PPF and EPF, which are on an EEE (exempt, exempt, exempt) regime. The Centre could consider making NPS at par with EPF/PPF, by making it entirely tax free. In Budget 2016, the government had announced additional tax deduction towards investment in the NPS under section 80CCD (1B) over and above the limit of Rs 150,000, under section 80C.
The government may consider enhancing this limit to make it more attractive. Third, to boost affordable housing sector, and achieve its motto of “housing for all”, the government may consider enhancing the deduction towards interest on home loan to Rs 300,000, from the present limit of Rs 200,000 in the case of self-occupied property. Further, under the existing law, an individual can claim a deduction towards pre-construction period interest in five-equal yearly instalments once the house is ready for occupation. However, this deduction is within the overall limit of Rs 200,000 in case of a self-occupied property. For instance, on a loan of Rs 50 lakh at 8.4% for 15 years, the interest payment during the initial years would easily cross the threshold of Rs 200,000. Given the increasing cost of property and higher interest payments during the initial years, this limit of Rs 200,000 is not sufficient even for low-cost housing. The government should consider either providing a separate limit for deduction towards pre-construction period interest or allowing the interest payment as deduction even during the period of construction.
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Section 80EE was introduced in Budget 2016, allowing additional deduction of Rs 50,000 towards interest paid on housing loan, provided that the loan was taken in FY17. This benefit is not available in FY18. The government may re-introduce this benefit. Fourth. the government is focusing on the development and strengthening of country’s infrastructure and the digital landscape. Earlier, an individual could invest in tax-saving infrastructure bonds that would entitle her for a deduction up to Rs 20,000, but this benefit was withdrawn subsequently. With the heavy thrust on infrastructure, the government may consider reintroducing this deduction. Additional relief may be considered for investments in digitisation. Fifth, currently, any long-term capital gain on the sale of equity-oriented mutual funds/shares is exempt from taxation. The holding period to qualify as long-term capital gain is one year in case of such investments.
The Prime Minister had said that those who profit from financial markets, must make a fair contribution to nation building through taxes. These tax reliefs have helped the capital markets in the past several years. However, considering the low levels of personal tax collections and the continuing objective of the government to increase the tax base, the government may seek to strike a balance and rationalise the tax reliefs currently available. The holding period of debt mutual funds can also be brought in line with equity-oriented mutual funds to remove any inconsistency across various financial instruments. These are challenging and conflicting objectives that the government faces. In a few days, it will be seen how the government fulfils its objectives of widening the tax base while maintaining the fiscal deficit, keeping in mind the common man’s expectations from the Budget.