Budget may rationalise deductions, exemptions

As the current government is all set to present their last full Budget before the 2019 general elections, the common man is again thinking if there will be any relief for him this year.

While the previous Budget gave a slight relief by lowering the tax rate from 10% to 5% for the first slab, it won't be unreasonable to expect the tax-free ceiling limit to be expanded from Rs 2.5 lakh to Rs 3.5 lakh.

Finance Act 2017 brought about an unpleasant shock by capping the loss from house property which could be set off against other income in the same year to Rs 2 lakh. The balance now has to be carried forward and set off against future rental income. While the government is promoting real estate by introducing Real Estate Regulation Act, it is also restricting the benefit available to taxpayers on account of housing loan interest. Hence, to facilitate promotion the government should consider increasing the housing loss set-off limit from the existing Rs 2 lakh. Further, an increase in the limit for housing loan interest deduction for self-occupied property from the existing Rs 2 lakh or an increase specifically targeted at pre-construction interest (which currently gets included in the overall limit of Rs 2 lakh) would increase savings for home owners.

Capital gain taxation provisions have become more stringent over the years. The current Budget may continue this trend by increasing the holding period for listed equity shares and equity mutual funds to two years from the current holding period of one year to qualify as long-term or by levying a tax on the sale of such securities.

Another change in the investment space is that the government may make dividend fully taxable in the hands of the shareholders, thereby abolishing dividend distribution tax. This may encourage more companies to declare dividends and individual investors will be able to pay taxes at the applicable slab rates and avoid double taxation on dividends prevalent presently.

Budget 2018 will be expected to provide relief in terms of rationalisation of deductions and exemptions. Section 80C deduction limit is expected to be enhanced to Rs 2 lakh from the current Rs 1.5 lakh (set in FY 2014-15). Also, considering the rising inflation and ever growing medical expenses, one would expect an increase in the limit for medical insurance deduction from Rs 25,000 to Rs 80,000. The tax-free medical reimbursement limit should also be increased from Rs 15,000 (set in FY 1998-1999) to at least Rs 30,000 per year.

Despite the government's measures to increase the NPS subscriber base, EPF is still viewed to be far more tax lucrative. Budget 2018 may attempt to resolve this by making NPS more tax-friendly by increasing the tax exemption on lump sum withdrawal to 60% from the current 40%. Additional tax deduction for contribution to NPS under Section 80CCD(1B) may be increased to Rs 75,000 or Rs 100,000 from the current limit of Rs 50,000. Rules for optional transition from EPF to NPS may be rolled out but questions like taxability on such transfer of funds which is currently exempt from tax under EPF needs to be addressed upfront.

In view of changes like demonetisation, introduction of Black Money Act and information received under information exchange treaties, it would not come as a surprise if there are more detailed disclosure requirements in the return of income.

With an objective of creating digital taxpayer friendly environment, one may expect a jurisdiction free e-assessment, digital processing of PAN application, etc, but the biggest relief for the common man would be faster processing of refunds and rectifications. However, digitalisation creates certain challenges like freezing certain tax position which may not be the correct intention of the law; hence, the government should create a platform to address such grievances swiftly.

While the expectations of a taxpayer-friendly Budget are definitely on the rise in view of the upcoming elections, one will have to wait and watch how the government actually ushers in 'Acche din' for us common men by simultaneously providing reliefs, improving investment opportunities and making tax administration strong and friendly.

The writer is tax partner, EY India