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Budget 2020: 20 tax-payer friendly ideas for the Finance Minister

ET Wealth reached out to financial services cos and taxpayers on what they want to see in this budget.

, ET Bureau|
Updated: Dec 17, 2019, 10.43 AM IST
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PTI
Nirmala-PTI
One of the demand is extending tax relief on interest income to all taxpayers.
The government is working hard to get the economy back on track. “The worse than expected slowdown in growth calls for urgent measures. We need a big-bang growth Budget,” says V.K. Vijayakumar, Chief Investment Strategist at Geojit Financial Services. Three months ago, the corporate tax rate was slashed to boost the corporate sector.

However, though the move is expected to improve the bottomline of companies, it has failed to spur consumption. “The cut in corporate tax rate can increase the profits of a company. However, for a sustained growth in business, more people must buy its products. The demand side needs to be addressed by increasing the disposable income of customers,” says G. Pradeepkumar, CEO, Union Mutual Fund.

One way to do this is by cutting personal income tax rates. Already, hopes are high that the coming Budget will offer a big relief in taxes. “The cut in corporate tax was a major reform. It is only logical that the benefit is extended to individual taxpayers too,” says Vijayakumar. However, a cut in personal income tax rates won’t be easy when the exchequer is already reeling under the impact of revenue foregone due to the corporate tax rate cut. The government will have to strike a balance between the expectations of taxpayers and the resources at its disposal.

ET Wealth reached out to financial services companies and common taxpayers for measures they want to see in the coming Budget. Most of the suggestions are likely to put pressure on the government’s finances. However, experts believe these steps could kickstart the economy. If the basic exemption limit is increased to Rs 10 lakh, the increase in disposable income may lead to higher consumption, which in turn could lead to a virtuous cycle of higher capacity utilisation by industries, more investments and creation of more jobs. “The overall benefits are far more likely to outweigh the short term revenue loss,” says Pradeepkumar.

Similarly, making rental income tax free may appear a radical idea, but it will give an adrenaline shot to the real estate sector. “A meaningful improvement in the real estate sector can have a cascading impact on the entire economic ecosystem,” says A. Balasubramanian, Managing Director & CEO, Aditya Birla Sun Life AMC. It will create employment, boost demand for raw materials and ancillary industries and also enhance revenues for the government by way of GST collections, stamp duty and municipal charges. “These incremental benefits could compensate for the tax loss on rental income,” adds Balasubramanian.

As the Finance Minister Nirmala Sitharaman and her team sit down to prepare the Union Budget, we hope they will take note and some of these ideas will find their way into the Finance Bill.

  • Offer tax breaks for education savings: Nitin Vyakaranam CEO and Founder, Arthayantra
NitinVyakaranam

Saving to buy a house, children’s education and retirement planning are the top three goals of Indian investors, though not necessarily in the same order. Though tax rules offer several benefits for those saving to buy a house or for retirement, the education goal has been largely ignored. Education expenses account for almost 25% of the total expenditure of the average Indian family. These expenses are growing at 12% per year, the second highest inflation after healthcare. These expenses are primarily met from the monthly cash flows, making it precarious for families in case an emergency crops up. Parents dip into retirement savings (PF or PPF) or take expensive personal loans to fund these costs.

The Budget should encourage investors who want to save for their children’s education. This can be done by providing tax benefits to saving instruments, much like the I-529 plan in the US. At the same time, tuition fee should be removed from Sec 80C and a separate deduction should be offered for education expenses. These measures will not only reduce the stress on the family finances but also encourage families to start saving for this critical financial goal.

  • Separate deduction for education expenses: Ruchi Sehrawat, 36 Assistant Professor, Gurgaon.

Ruchi-Sehrawat

“The deduction limit of Rs 1.5 lakh under Section 80C is too low. Considering the high cost of education these days, the deduction for children’s tuition fees should be in an altogether different basket."

  • Deduction for home and vehicle insurance: Anik Jain Co-founder & CEO, Symbo India Insurance Broking Limited
Anik-Jain

India is grossly under-insured compared to the developed world and while tax deductions are in place for health and life insurance, it is desirable to extend such deductions to asset insurance as well. Apart from motor insurance, which is mandatory by law, the penetration of other types of asset insurance remains low. Extending tax deductions to products such as fire insurance and property and casualty insurance will make them lucrative for customers.

  • Exempt switches between schemes from capital gains tax: Ajit Menon, CEO, PGIM India
Ajit-Menon

Retirement is a long-term goal and investors often have to make changes in their asset mix or choice of investment during the span of the investment. Mutual funds score over other options in terms of liquidity, costs and transparency but the tax rules governing mutual funds are a drawback. There is no tax when an investor switches from one fund to another in a Ulip, a pension plan or the NPS. However, in case of mutual funds, switching from one scheme to another is treated as a sale transaction and could lead to capital gains, which are taxable in certain situations.

For instance, if you switch out of debt funds and conservative hybrid funds before three years, any profit made is a short-term capital gain and gets added to your income. If the switch is made after three years, gains are taxed at 20% after indexation benefit. When switching out of equity funds or aggressive hybrid funds before a year, the gains are taxed at 15%. After one year, gains of up to Rs 1 lakh are tax free. Any gain beyond this threshold is taxed at 10%.

To bring parity in the tax treatment of retirement savings, switching between one scheme to another should be exempt from tax as long as the investment is held in the same folio. This will help retail investors manage asset allocation through market cycles in a more tax efficient manner and also promote a long-term orientation.

  • Abolish triple taxation: Dr V.K. Vijayakumar, Chief Investment Strategist, Geojit Financial Services
Dr-V.K.-Vijayakumar

There are five taxes on capital in India—corporate tax, dividend distribution tax, tax on dividend above Rs 10 lakh, capital gains tax (long-term and short-term) and securities transactions tax. Companies pay tax (corporate tax) on the profits they earn. When dividend is paid to shareholders from the post-tax profits, the dividend distributed is taxed (dividend distribution tax). The 15% DDT is, including surcharge and education cess, effectively 20.35%.

Finally, when the individual taxpayer pays personal income tax, he pays tax if the dividend exceeds Rs 10 lakh. This triple taxation is pernicious and makes the tax system complex. The Budget needs to streamline and rationalise the capital market tax structure. It should abolish the DDT, thereby removing the perversity in taxing the same income thrice. If DDT is removed, it will augment the investible funds of the corporates and boost capital formation. The consequent higher growth and tax buoyancy will compensate for the revenue loss.

  • Extend additional home loan deduction to everyone: Raj Khosla, Managing Director, Mymoneymantra
Raj-Khosla

The government has announced several measures to ease the problems facing the real estate sector as also rolled out several tax incentives to encourage buyers, especially first-time homebuyers and the middle class segment. Under the new Section 80EEA, first-time homebuyers with loans of up to Rs 35 lakh can claim an additional deduction of Rs 1.5 lakh for the interest paid provided the value of the house does not exceed Rs 45 lakh. This deduction is over and above the Rs 2 lakh deduction for home loan interest under Section 24.

However, restricting this additional tax benefit only to houses worth Rs 45 lakh and for loans up to Rs 35 lakh means only the lower slabs of the market (the affordable housing segment) will see an upsurge in demand. For the rise in demand to be truly secular, these restrictions should be removed and a higher deduction should be extended to all home buyers.

There is a compelling reason for raising the deduction under Sec 24. The Finance Minister will note that the deduction was last revised in 2014, when the limit was raised from Rs 1.5 lakh to Rs 2 lakh. In the past five years, property prices across the country have risen. Even a modest 2-BHK house in a metro now costs upwards of Rs 70-80 lakh. Assuming a loan to cover 75% of the value of the property, the buyer requires a loan of Rs 50-60 lakh. The deduction of Rs 2 lakh will not be able to fully cover the interest paid on such a loan and therefore the limit needs to be hiked to at least Rs 5 lakh, regardless of the price of the property.

  • Reduce TDS for professionals: Gaurav Pingle, 32, Finance Professional, Pune
Gaurav-Pingle

The 10% TDS on fees for professional or technical services is a big hassle. The amount is deposited with the government, but in most cases it eventually gets refunded to the taxpayer when he files his return. To avoid lock-in of funds and reduce the hassles of refund, the Budget should reduce TDS for professionals to 5%.

  • Tax-free savings to buy a house: Vikas Gupta, CEO & Chief Investment Strategist, OMNISCIENCE
Vikas-Gupta

Buying a house is a universal need. The Budget should roll out a special investment and savings account where individuals can save to pay for the downpayment or buy their dream house. Such ‘homebuyer accounts’ should allow contributions of up to Rs 5 lakh a year (which can increase with inflation every year). If this contribution is given a tax break and the gains are tax free as well, it will encourage people to save for buying a house. This would increase home ownership in the future as prospective buyers start saving much before they actually buy.

  • Make rental income tax free to encourage investment in real estate: A. Balasubramanian, Managing Director & CEO, Aditya Birla Sun Life Mutual Fund
A.-Balasubramanian

The government should consider making rental income completely tax free, irrespective of the value of the property or aggregate income arising from such income. As it is, rental income in India is low, with rental yields ranging from 1.5 to 3%. The tax on this rent reduces the effective returns from real estate investments.

If rental income is made tax free, more people will be encouraged to invest in property. Yes, the move will impact the revenue collections to some extent, but it will also boost demand for real estate, especially in metros. A meaningful improvement in the real estate sector can have a cascading impact on the entire economic ecosystem.

From employment creation, to boosting demand for raw materials such as cement and steel, generating demand for household items like home textiles, electricals, decorative goods, sanitation ware, and kitchen appliances among other things. Revival of the real estate sector will also enhance revenues for the government. The GST collections, stamp duty and maintenance charges to municipalities will see an upsurge. These incremental benefits could compensate for the tax loss on rental income. This move could potentially remove the logjam in the real estate sector’s high inventory levels and create enough leg-room for new asset building.

  • Encourage entrepreneurship and boost internship: Sudhir Kaushik, Co-founder and COO, Taxpanner.com
Sudhir-Kaushik

Entrepreneurs are forever in need of funds for their businesses. Two years ago, a new Section 54GB was introduced, under which the capital gains were made exempt if the sale proceeds of property were used to buy specified assets of a new/eligible business within a specified time. The objective was to encourage entrepreneurship, thus increasing employment to some extent.

However, this benefit should not be limited to specified assets and businesses. Instead of setting up a plant or purchasing machinery, a businessman in the services sector may want to use the sale proceeds to hire more employees. The Budget should extend this benefit to him as well. In fact, investments in startup companies should be eligible for tax deduction.

India has not been able to encash its demographic dividend because the fresh graduates churned out by our education system don’t have the skills the corporate sector requires. Besides boosting employment, the Budget should encourage companies to hire more interns by offering 200% deduction for internship expenses. So, if a company spends Rs 1 crore on stipends and other costs relating to interns, it should be allowed to claim a deduction of Rs 2 crore as business expenses. This will allow corporates to offer decent stipends to interns without hurting their profits. On the other hand, new joinees would get employed faster and receive solid industry experience. However, internship should be clearly defined so that it doesn’t become a tax evasion tool.

  • Hike tax threshold for LTCG from equities: Sailaxmi Reddy, 23 Bank Executive, Mumbai
Sailaxmi-Reddy

"The tax on gains beyond Rs 1 lakh has dented investor sentiment. The threshold should be hiked to at least Rs 3 lakh."

  • Raise basic exemption to Rs 10 lakh: G. Pradeepkumar, CEO, UNION AMC
G.-Pradeepkumar

Reducing the corporate tax rate has increased the profitability of the corporate sector. However, the demand side needs to be addressed as well by increasing the disposable income of consumers. The basic exemption limit should be increased to Rs 10 lakh to spur demand, which in turn can take the economy into a virtuous cycle of higher capacity utilisation, more investments, more jobs and higher consumption. The overall benefits are far more likely to outweigh the short term revenue loss on income tax.

  • Raise presumptive tax rate to augment revenues: Archit Gupta, Founder and CEO, Cleartax
Archit-Gupta

Presumptive taxation is a simple scheme that allows small businesses (or proprietors) and professionals to file basic returns without having to pay advance tax or do full fledged book keeping. Last year’s Budget had extended the presumptive taxation scheme to professionals with annual receipts under Rs 50 lakh and increased the limit for small businesses from Rs 1 crore to Rs 2 crore. This led to better compliance and higher tax collections.

Small businesses currently offer 8% (or 6% if digital) of their turnover as income on which tax is levied. This percentage may be increased for specific businesses, especially service-oriented businesses, where income is likely to be much higher than the 8% limit. This could help check tax evasion as also help small neighborhood businesses that do not have the means to do full circle compliance. They can be compliant and yet the effort required is minimal. This increase in tax rate is suggested to compensate for a tax relief that may be in the works for the salaried. Due to pressure on collections, it may not be possible to afford a tax cut without a corresponding increase in taxes elsewhere.

  • Rationalise tax rates and tenures for capital gains for different assets: Rajesh Cheruvu, Chief Investment Officer, Validus Wealth
Rajesh-Cheruvu

Often investment decisions or advice are simply driven by post-tax returns and not by the core qualities of the asset. But the taxation of capital gains is quite complicated. Gains from equity funds, aggressive hybrid funds and stocks are long term capital gains if the holding period is more than one year. In case of real estate, this minimum holding period is two years. And for gold, gold funds and all other mutual funds (including foreign equity and global funds), it is three years. The tax rates also differ. The Budget should rationalise the capital gains tax structure to ease tax compliance for individuals. Uniformity in taxation has also been recommended by the task force on the Direct Tax Code.

  • Increase basic exemption for senior citizens: B.C. Joshi, 76 Retiree, Delhi
BC-Joshi

“Even with the additional exemption of Rs 50,000 for interest income, the basic exemption for senior citizens is too low at Rs 3 lakh. It should be enhanced to at least Rs 4 lakh.”

  • Make NPS more attractive for investors: Amit Maheshwari, Partner, Ashok Maheshwary & Associates
Amit-Maheshwari

Numerous surveys have shown that Indian investors score low on retirement readiness. Many Indians are just not saving enough for that critical goal. The National Pension System stands out as a flexible, robust and cost-effective avenue to save for retirement. It also offers unique tax breaks to taxpayers, which has attracted many investors to the scheme. Yet, despite the many advantages it offers, NPS is still not the instrument of choice for most Indians.

To make it more attractive, the Budget should enhance the tax deduction offered under Sec 80CCD(1b). If the limit is raised from Rs 50,000 to Rs 1 lakh, investors will be encouraged to save more for retirement. Secondly, the deduction limit under Section 80CCD(2) needs to be reviewed. Under this section, an employee can voluntarily contribute a higher amount to the NPS and claim tax deduction. The limit is 14% of the basic pay for government employees, but only 10% for private sector employees. The deduction limit for self-employed professionals was raised from 10% to 20% of gross income in 2017. It is time, therefore, to raise the limit for private sector employees to 14% to bring them at par with government employees.

  • Separate deduction for term insurance plans: Vineet Arora, MD & CEO, Aegon Life
Vineet-Arora

The Insurance Regulatory and Development Authority of India (Irdai) estimates that the protection gap between insured losses and economic losses in the country is 70-80%, and insurance penetration is 3.7% of the GDP. Given this huge protection gap and its potential impact on the nation, the Budget should incentivise pure protection term plans. A separate deduction of Rs 25,000 for term plan premium would certainly nudge buyers to secure themselves. It would especially be helpful for young Indians who join the national workforce every year.

  • Increase deduction limit for health insurance: Pushan Mahapatra, Managing Director & CEO, SBI General Insurance
Pushan-Mahapatra

Healthcare costs have shot up in recent years and continue to rise at a fast pace. Moreover, the incidence of critical illnesses has seen a dramatic rise. To counter this, people need to take a higher health insurance cover. The Budget should incentivise this by raising the deduction limit for medical insurance premium under Section 80D from Rs 25,000 to at least Rs 50,000 for self and family.

The limit for senior citizen dependent parents should be raised from Rs 50,000 to Rs 75,000. At the same time, the GST for personal lines of insurance (health, home, accident) should be reduced from 18% to 5%. These measures will be a huge relief for those who are struggling to meet rising healthcare costs.

  • Roll out a voluntary disclosure scheme: Vivek Jalan, Co-chairman, Taxation Committee of Bengal Chamber of Commerce
Vivek-Jalan

The Budget should announce a dispute resolution scheme wherein pending tax disputes can be settled after paying a certain portion of the disputed amount. There could also be a voluntary disclosure scheme to encourage taxpayers to come clean on their undeclared wealth. Such a scheme would increase the taxpayer base as most individuals would grab the opportunity to make a fresh start.

  • Extend tax relief on interest income to all taxpayers: Panna Bhandari, Founder, Emerald Investments
Panna-Bhandari

Fixed deposits and small savings schemes are the staple investments of retail investors in India. Considering that retail savings have been adversely impacted by falling interest rates and defaults by debt issuers, a small tax break on interest income will provide some relief. The 2018 Budget had given senior citizens an exemption of up to Rs 50,000 for interest earned on bank deposits, post office schemes and bonds. This should be extended to all taxpayers. The exemption to Rs 50,000 interest income would effectively mean that there will be no tax implication for taxpayers in the general category who invest up to Rs 8 lakh in a fixed deposit at 6.25%.

(With Sanket Dhanorkar)

Also Read

Budget 2020: Types of deficits & how they are calculated

Relaxation, clarification on capital gains tax needed in Budget 2020: EY

Hike in tax sop for health insurance premium sought in Budget 2020

Budget 2020: What’s next for Private Equity and Venture Capital industry

What do mutual fund investors expect from Budget 2020?

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