Budget 2020 Expectations for Individual Taxpayers: The budget, one of the most eagerly-awaited annual policy announcements by the government in the last quarter of the fiscal year, is round the corner. In the lead up to the event, individual tax payers are really hoping for a populist budget that leaves more money at their disposal.

Recent reduction in corporate tax rates has further raised the aforesaid expectation. From the government’s perspective, any measure that boosts domestic consumption has to be evaluated from a holistic lens, including impact on the government’s fiscal position.

The following is the wish list on the personal tax front:

The interim budget presented on 01 February 2019 enhanced the tax rebate to Rs 12,500, which resulted in effectively nil tax payment by individual taxpayers with income below Rs 5 lakh. Keeping in line with the stated intent of the government to widen the tax base and increase the number of individuals filing tax returns, one hopes that this rebate is enhanced further.

Simultaneously, the prescribed limit for deduction under Section 80C of the Income-Tax Act, 1961 for various specified investments/expenditure, which is currently pegged at Rs 1.5 lakh, may be enhanced to at least Rs 3 lakh to accord more headroom for various investments/expenditures covered therein. Alternatively, a separate deduction may be introduced (in addition to the proposed enhanced limit) for certain high-value transactions, such as children’s tuition fee (keeping in mind the substantial increase in the cost of education over the last few years) and principal repayment of housing loan (to boost the realty sector).

Such measures, many believe, could incentivise savings and inculcate healthy investment habits among retail investors. The impact of the aforesaid measures, however, also needs to be evaluated from a fiscal consolidation standpoint as the government seems to be committed to achieve the fiscal deficit target of 3.3 per cent in FY 2020, especially when there is a shortfall in the direct tax collections till date for the current fiscal vis-à-vis last year, according to government sources.

Moreover, various exempt allowances available to salaried taxpayers have outlived their utility with rising inflation. Hence, there is an expectation that the limit of such allowances should be revised upwards, say children’s education allowance from Rs 100 to Rs 500 per month per child, children hostel allowance from Rs 300 to Rs 1,500 per month per child, meal vouchers from Rs 50 to Rs 100 per meal, etc. Medical reimbursement and travel allowance exemption were done away with from FY 2019 and standard deduction was introduced in lieu of them. With spiraling medical and fuel costs, the finance minister may evaluate restoring such exemptions with higher limits (say medical reimbursement of up to R 50,000 per annum and travel allowance of up to Rs 3,000 per month). Furthermore, standard deduction of Rs 50,000 may be linked to the income levels of taxpayers, thereby making it more progressive in nature vis-à-vis a fixed limit.

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To reignite the momentum in the real estate sector, the government may assess enhancing the standard deduction of 30 per cent of net annual value to 50 per cent, increasing the current limit of deduction for interest payable on housing loans on self-occupied properties to Rs 4 lakh per annum, moderation of the limit of Rs 2 lakh for set-off of loss from housing property against any other head of income and separate deduction for pre-construction period interest, etc. The government had introduced an additional deduction of Rs 1.5 lakh of interest on housing loans for first-time home buyers when the stamp duty value of the property was below Rs 45 lakh and the loan was sanctioned in FY 2020. In order to provide a boost to the affordable housing initiative of the central government, this deduction may be extended for first-time home buyers in FY 2021 as well.

Effective FY 2019, long-term capital gains (LTCG) exceeding Rs 1 lakh earned from transfer of equity shares of a company or a unit of equity-oriented mutual funds on which the securities transaction tax has been paid at the time of acquisition, are subject to taxation at 10 per cent without the indexation benefit. On account of such tax, tax collections were estimated to rise upwards by Rs 38,000 crore annually, but it is understood to have remained subdued thus far. Though such gains were grandfathered up to 31 January 2018, this move has resulted in higher tax outgo for certain taxpayers. To boost investor confidence and incentivise infusion of further capital into the economy, the government may evaluate reverting to the tax-exempt regime on such gains.

The lowering of corporate tax rates has been an effort in the direction to encourage the supply/capacity-building side of the economy. Changes, if any, brought about on the personal tax side generally have a bearing on the demand and consumption side of the economy. Consequently, while the common man looks forward to a personal tax-friendly budget, the finance minister is tasked with balancing this expectation with addressing the government’s overall fiscal balance sheet.

(By Parizad Sirwalla, Partner and Head, Global Mobility Services – Tax, KPMG in India)