​​​
  1. Editorial: Don’t hike tax exemptions

Editorial: Don’t hike tax exemptions

Better to remove 80C and hike the no-tax floor

By: | Published: February 6, 2015 3:20 AM

RBI Governor Raghuram Rajan calling for a higher I-T exemption limit for investments in savings under Section 80C ahead of the budget on February 28 may please the taxpayers, but finance minister Arun Jaitley needs to focus on providing stability to the tax structure instead of tinkering with it every year. Given how savings levels have fallen from 36.8% of GDP in FY08 to 30% in FY13, Governor Rajan is probably motivated by the need to hike incentives for savers. But, apart from the fact that savings are not linked to tax breaks or returns on investment alone—they are more likely influenced by income levels—Jaitley needs to keep in mind that he gave considerable tax benefits in his maiden budget in July last year. The tax exemption limit was raised from R2 lakh to R2.5 lakh, Section 80C investment limits were hiked from R1 lakh to R1.5 lakh, and the deduction limit for interest on a home loan, from R1.5 lakh to R2 lakh. All of this, the revenue foregone statement next year will show, would have cost a pretty packet—while the minister said the net impact of his direct tax proposals would be a loss of R22,000 crore, the final numbers will be out only in the February budget. In FY14, the revenue foregone on account of Section 80C benefits added up to a tidy R28,000 crore out of the total of R33,000 crore for individual taxpayers.

What the finance minister should do instead of making changes in Section 80C limit and enhancing other tax benefits, is hike the overall exemption limit from the current R2.5 lakh to R4 lakh or R5 lakh, and subsume all tax benefits into it. This will clean up the personal income tax system in a big way and will also give taxpayers the freedom to choose where they want to invest their money. In any case, 90% of the taxpayers in FY12 reported an income of under R5 lakh and paid just 10% of the total tax collections. The real problem to address is that of the “missing middle” where tax collections are very low; in contrast, those showing an income of over R20 lakh comprised 1.1% of the tax base but paid 63% of the total tax. One part of the reason for low compliance levels in the middle income level could be the fact that the personal income tax rate of 30% kicks in at a low R10 lakh annual income, encouraging people to misdeclare their incomes. The finance minister has already said he will relook the Direct Taxes Code, but this would be a good start to the process of simplifying direct taxes at least at the level of individual taxpayers.

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

  1. M
    M.DORAI
    Feb 7, 2015 at 1:54 pm
    Sir, Thank you for publishing my comments. But the figures which I submitted in a table format have gone helter skelter making the readers unable to comprehend. I am furnishing herewith my revised comments with a request to replace the same: Dear Editor, The proposal of the Finance Minister to do away with the saving clause Under Section 80C which permits exemption of income tax upto Rs.1.5 lakh of savings and to enhance the exemption limit from Rs.2.5 lakhs to Rs. 4.00 lakhs will not be beneficial to the ried cl. Implementation of such a proposal shall not only discourage the savings which take care of the present and future need of the ried employees and their dependants, but at the same time add to the additional tax liability of the ried employees from the existing level, which can be seen as under: PRESENT INCOME TAX RATES: Upto Rs.2.5 lakhs Nil. 2.5 lakhs to 5.00Lakhs @ 10%, 5.00 lakhs to 10 lakhs @ 20%, Above 10.00 lakhs @ 30% and 3% education cess (with exemption upto Rs.1.5 lakhs for savings under section 80C) PROPOSED INCOME TAX RATES by the Finance Minister: Upto Rs.4.00 lakhs nil,4.00 to 5.00 lakhs @ 10%, 5.00 to 10 lakhs @20%, Above 10 lakhs @ 30% and 3% education cess (No exemption for savings under 80C). Of course for income group upto 5.00 lakhs the tax liability will be same without any increase or decrease if the proposed income tax rates are implemented in the ensuing budget. But for income above 5.00 lakhs to Rs.10.00 lakhs which comes under 20% slab, the additional liability will be Rs.15,450/. Similarly for income above Rs.10.00 lakhs, which comes under 30% slab, the additional liability will be Rs.30,900/-. Thus the proposal to abolish the saving clause under Section 80C and to increase the income tax exemption limit to Rs.4.00 lakhs will in no way benefit the ried cl, but on the other hand would increase their taxation burden from the existing level which may cause resentment among the ried employees. The best proposal will be to increase the income tax exemption limit upto 3.00 lakhs and rise the saving limit under 80C from Rs.1.5 lakhs to Rs.3.00 lakhs to encourage more savings among ried employees May I request the editor to bring home the above facts to the Ministry of Finance. M.DORAI doraiesic@gmail
    Reply
    1. M
      M.DORAI
      Feb 6, 2015 at 12:39 pm
      Dear Editor, The proposal of the Finance Minister to do away with the saving clause Under Section 80C which permits exemption of income tax upto Rs.1.5 lakh of savings and to enhance the exemption limit from Rs.2.5 lakhs to Rs. 4.00 lakhs will not be beneficial to the ried cl. Implementation of such a proposal shall not only discourage the savings which take care of the present and future need of the ried employees and their dependants, but at the same time add to the additional tax liability of the ried employees from the existing level, which can be seen as under: PRESENT INCOME TAX RATES: Upto Rs.2.5 lakhs Nil. 2.5 lakhs to 5.00Lakhs @ 10%, 5.00 lakhs to 10 lakhs @ 20%, Above 10.00 lakhs @ 30% (with exemption upto Rs.1.5 lakhs for savings under section 80C) and 3% education cess. PROPOSED INCOME TAX RATES by the Finance Minister: Upto Rs.4.00 lakhs nil,4.00 to 5.00 lakhs @ 10%5.00 to 10 lakhs @20%, Above 10 lakhs @ 30%(No exemption for savings under 80C) and 3% education cess INCOME LEVEL PRESENT TAX TAX LIABILITY EXC ESS LIABILILTY UNDER NEW LIABILITY EXEMPTING PROPOSAL SAVINGS WITHOUT UNDER 80C SAVINGS UPTO 5.00 LAKHS Rs.10,300 Rs.10,300 nil Upto Rs.6.00 lakhs Rs.20,600 Rs.30,900 Rs.10,300 Upto 6.5 lakhs Rs.25,750 Rs.41,200 Rs.15,450 Upto 7.00 lakihs Rs.36,050 Rs.51,500 Rs.15,450 Upto 8.00 lakhs Rs.56,650 Rs.72,100 Rs.15,450 Upto 10.00 lakhs Rs.97,850 Rs.1,13,300 Rs.15,450 Upto 10.50 lakhs Rs.1,08,150 Rs.1,28,750 Rs.2 0,600 Upto 11.00 lakhs Rs.1,18,450 Rs.1,44,200 Rs.25,750 Upto 11.50 lakhs Rs.1,28,750 Rs.1,59,650 Rs.30,900 For any income above 6.5 lakhs to Rs.10.00 lakhs the additional liability will be Rs.15,450/. For any income above Rs.11.50 lakhs the additional liability will be Rs.30,900/-. Thus the proposal to abolish the saving clause under Section 80C and to increase the income tax exemption limit to Rs.4.00 lakhs will in no way benefit the ried cl, but on the other hand would increase their taxation burden from the existing level which may cause resentment among the ried employees. The best proposal will be to increase the income tax exemption limit upto 3.00 lakhs and rise the saving limit under 80C from Rs.1.5 lakhs to Rs.3.00 lakhs to encourage more savings among ried employees May I request the editor to bring home the above facts to the Ministry of Finance. M.DORAI
      Reply
      1. N
        Naran.V.
        Feb 6, 2015 at 11:45 am
        Exemption limit must be hiked because with inflation, the existing exemption limit has in real terms reduced. So increase will only amount to keeping parity. Whoever has written this Financial Express report may be on the payroll of big business. Big businesses are getting astronomical concessions and what not which these writers ignore for reason well known. They hit the ordinary ried cl.
        Reply

        Go to Top