What should the taxpayer expect from Budget 2018?

The Union Budget 2018 is around the corner; there is less than a month left for the Finance Minister (FM) to reveal what he has in store for taxpayers. Whether this year’s Budget will have personal taxation as a big ticket item remains to be seen, but as always, individual taxpayers have high expectations from the FM. Moreover, this being the Government’s last full-year Budget before the elections, peoples’ expectations of seeing some populist measures are not out of place. This is especially so because last year’s Budget was disappointing for many, particularly after the hardships people had faced during demonetisation.  

For the past few years, the average taxpayer has been attempting to draw the FM’s attention to the crying need for some relief which would enhance their disposable incomes. These expectations include a rise in the basic thresholds for tax exemption, an increase in the income slab that qualifies for a maximum marginal tax rate of 30 per cent, loosening of the existing cap on tax sops, etc.

Many of these monetary thresholds were set more than a decade ago, and in conjunction with rising inflation and food prices, people hankering for a reduced tax burden is not unreasonable. Higher disposable incomes will boost India’s economy with many more people being able to make investments, which should broaden the taxpayer base. Unfortunately, these recommendations have been consistently put on the back burner.

By calculating the impact of inflation over the last four years, the basic exemption threshold of Rs 2.5 lakh translates to around Rs 3.25 lakh, which means that at the very minimum, in order to bring parity to the cost of living, the basic exemption limit should be increased. Furthermore, with incomes touching the maximum tax rate very quickly, the average salaried person is incredibly squeezed between the low taxable threshold and the higher tax bracket. Therefore, increasing the income threshold from Rs 10 lakh to Rs 20 lakh for the 30 per cent tax rate slab would be very welcome.  

For salaried individuals, the threshold of exemptions (medical reimbursement, conveyance allowance, education allowance for tuition and hostel fees for children, etc.) needs to be revamped. Most of these thresholds have ceased to be relevant long ago and are not commensurate with the current cost of living and price index. It is also a burden for employers to collect proof of expenditure, etc., to allow their employees these exemptions. Instead, a flat standard deduction of up to Rs 1.5 lakh would be much more effective.  Given that the salaried class is the most tax compliant, acknowledged by FM in his budget speech, there is also a general feeling that this section of taxpayers is usually the most neglected when it comes to tax benefits granted by the government. Hence, a standard deduction would go out as a goodwill gesture from the FM for middle-class salaried taxpayers.

Apart from the above, some changes would have a positive cascading impact on certain priority growth sectors in the Indian economy, e.g., allowing a tax benefit for Leave Travel Concession every year instead of twice in a block of four years.

The FM could also consider allowing an exemption on accommodation expenses in addition to travel costs. With India’s tourism industry having a huge potential for growth, this concession will encourage taxpayers to spend more on holidays in India. It will give a boost to the transport and hospitality industries as well as ancillary industries such as art and craft, and cottage industries. This benefit could also be effectively extended to the non-salaried class.

Another sector that is struggling to recover from the slump is the housing segment. Providing some sops to taxpayers such as increasing deduction for home loan interest under section 80C, giving an additional rebate for repayment of home loans and increasing the threshold for carried forward loss from house property from Rs 2 lakh to Rs 3 lakh can give a significant fillip to the housing industry. It is also expected that the provisions related to deemed rental income from more than one self-occupied house should be revisited.

Furthermore, it is important to provide financial security to senior citizens, who are already struggling in a hostile market scenario with reduced incomes from bank deposits due to decreasing interest earning rates. The FM could consider exempting interest income from bank deposits, or alternatively, by increasing the basic income exemption amount to Rs 10 lakh.

And last but not the least, increasing deduction under section 80C from Rs 1.5 lakh to Rs 3 lakh will encourage taxpayers to invest in various savings and investment options in the organised financial market, e.g., in infrastructure bonds, life insurance products and bank deposits.   

The countdown has begun and the market is buzzing with expectation! But how the FM balances allocations in his Budget will only be known when the D-day arrives on February 1.

The author is Partner – Personal Tax, PwC India. Ritika Arora, Associate Director, PwC, also contributed to this article. The views expressed in this article are personal.