Budget expectations: Can taxes be less taxing?

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“This is too difficult for a mathematician. It takes a philosopher,” said Albert Einstein about difficulty in comprehending his tax returns.

A simple Google search on ‘famous quotes on taxes’ will throw up hundreds of results. Interestingly, the public opinion about personal tax has not changed for decades if not centuries.

India’s tryst with taxes

About a year ago, the Central Board of Direct Taxes (CBDT) gave interesting data for FY 18-19.

• From India’s total population of 130 crore people, only 1.46 crore are liable to pay income tax
• Of this, around 1 crore individuals disclosed income between Rs 5-10 lacs
• Only 46 lakh individual taxpayers disclosed income above Rs 10 lacs
• Merely 8,600 individuals showed annual income over Rs 5 crore
• Just 2200 doctors, chartered accountants, lawyers, and other professionals disclosed annual income of more than Rs 1 crore from their profession (excluding other incomes like rental, interest, capital gains among others) in the returns filed.

Until we are able to widen the tax net, the tax payer base could stagnate. So inducing new taxpayers to pay taxes by providing allowable deductions that improve quality of life is welcome.

Idea#1: Reduce tax rates across personal income tax slabs

In the first two taxation slabs that presently charge 5-10% as tax, reduce taxation rates to 3% & 7% respectively. This may not be a large value-hit for the government, but in this Covid-hit economy, it will put more money in the hands of the honest middle class taxpayer.

In the subsequent slabs where tax rates are 15-30%, reduce each slab by 5%. So the last slab will now become 25%.

To offset revenue loss to the government, add a new slab of 30% on annual taxable income over Rs 2 crore.

Idea#2: Increase various exemption limits

Most of the exemption limits for investments and allowable deductions have lower ceilings. These limits could be increased to encourage savings and for people to buy insurance. This insurance should be protection-focused, not investments products of insurance companies.

Idea#3: Medical insurance deductions

Healthcare expenses, medicine prices and hospitalisation expenses have been increasing past many years. To cater to this, deduction limit of medical insurance payments under 80D could be enhanced two times the current limit. This way, the middle class could suitably buy adequate insurance cover.

Idea#4: Home loan interest deduction

Your home loan EMI has two components – interest payment and principal repayment.

The interest portion of the EMI paid for the year can be claimed as a deduction from your total income up to a maximum of Rs 2 lacs under Section 24. To help middle class families access better quality (non-cramped) housing, it would be helpful to increase the deductible interest amount of Rs 2 lacs per year to at least Rs 5 lacs per year.

(The writer is an independent markets commentator. Views expressed are personal)