Budget 2021: Experts Suggest Personal Tax Tweaks For A ‘Never Before’ Like Budget
A cashier counts Indian one hundred-rupee banknotes at an Oriental Bank of Commerce branch in New Delhi, India. (Photographer: Prashanth Vishwanathan/Bloomberg)

Budget 2021: Experts Suggest Personal Tax Tweaks For A ‘Never Before’ Like Budget

Finance Minister Nirmala Sitharaman has promised a “never before” like budget on Feb. 1. While taxpayers impacted by the Covid-19 pandemic and a slowdown in the job markets have high expectations, experts say the government’s hands may be tied due to the ongoing fiscal constraints.

Yet, given the extra costs incurred by taxpayers on healthcare, insurance, office supplies, Budget 2021 can take some incremental steps to alleviate the pain, tax experts told BloombergQuint.

Budget 2021: Experts Suggest Personal Tax Tweaks For A ‘Never Before’ Like Budget

Higher Deductions = More Liquidity

Standard Deduction Limit

The government encourages savings by taxpayers in two ways. First, by exempting certain part of an individual’s income from the scope of tax. Second, by allowing deductions from the taxable income if the amounts are invested in a prescribed manner.

For instance, deduction of up to Rs 1,50,000 is available against long-term fixed deposits, equity-linked saving schemes, etc. under Section 80C of the Income Tax Act. Thus, any change in deduction or increase in exemption results in lesser tax and proportionately creates additional liquidity for taxpayers.

That’s the easiest way for the government to provide relief to salaried individuals, Paras Savla, partner at KPB & Associates, said. "The amount of standard deduction can be increased from the existing Rs 50,000 to Rs 1 lakh as it will further reduce the quantum of taxable income for employees."

Joint Return Filings

The second suggestion is to consider introducing joint return filings as is the norm in some foreign jurisdictions.

Rohinton Sidhwa, partner at Deloitte India, explained that in case of individuals, joint return filing reduces the number of tax returns that are filed and processed and also allows for a higher level of deductions for families.

For instance, for a couple where X is working and Y is not, the joint filing benefit would look something like this:

  • Applicable tax rate for X before clubbing returns:

Rs 0-2.5 lakh: Nil
Rs 2.5 lakh to Rs 5 lakh: 5%
Above Rs 5 lakh up to Rs 10 lakh: 20%
Above Rs 10 lakh: 30%

  • Post clubbing of income, the minimum thresholds in above tax slabs will double (X+Y)

0 to Rs 5 lakh: Nil
Rs 5 lakh to Rs 10 lakh: 5%
Rs 10 lakh up to Rs 20 lakh: 20%
Above Rs 20 lakh: 30%

Thus X will have to pay less tax since the thresholds will double if a joint return is permitted.

Medical Insurance

Under Section 80D of the income tax law, an individual can claim deduction against the medical insurance premium paid by him. Such insurance can be taken for self, the spouse, children and parents. A person below the age of 60 years can claim a deduction up to an amount of Rs 50,000 while the limit for senior citizens is Rs 75,000.

Pointing out the need for a change in these limits, Savla said that medical insurance premiums tend to increase beyond a particular age for an individual. As such, the government may think of increasing the above mentioned limits to Rs 75,000-1,00,000 and allow a further special rebate for Covid-19 related expenses in the budget, he said.

Work From Home

Covid-19 related restrictions meant that employees had to equip their homes to be able to work remotely.

Work-from-home shifted the burden of cost from employer to employee for certain work related expenses like electricity, internet, stationery, furniture, computers and printers, Ankit Jain, partner at Ved Jain and Associates, pointed out. "The finance minister may consider allowing a deduction to the employees for such expenses subject to certain terms and conditions."

Shailesh Kumar, partner at Nangia & Co. LLP, agreed. He said many companies have provided a "furniture allowance" to their employees for helping them to set up a home office, given additional allowance for meeting Covid-related expenditures like tests and treatment.

In order to provide relief, a special deduction or exemption against such expenditure may be allowed to salaried employees. This may be provided in the form of an actual reimbursement or additional standard deduction of Rs 50,000.
Shailesh Kumar, Partner, Nangia & Co. LLP

Also read: Budget 2021 Wishlist: Higher Income Tax Exemption Limit, Capital Gains Tax Changes

Timeline Reliefs

Deduction Timelines

The finance minister could also consider extending certain timelines to claim deductions, experts told BloombergQuint. Covid-19 caused significant disruption to the property market. So, timelines for claiming capital gains benefit for real estate transactions could be tweaked.

Capital gains arising from sale of a house is not charged in the hands of taxpayer if he constructs or purchases a new residential house within three years, and the capital gain arising from sale of earlier property is less than or equal to the cost of new one.

Savla pointed out that the government may think of extending the prescribed timeline of three years since construction of large projects may take longer than usual due to Covid-19 induced mobility curbs and slump in the real estate market.

Many existing projects have already been delayed. Hence, to allow the benefit of exemption to taxpayers, the existing limit of 3 years for completion of a project may be extended to five years.
Paras Savla, Partner, KPB & Associates

Tweaks For Non-Residents

The tax implications for non-residents and foreigners due to an extended stay in India as a result of Covid-19 will need to addressed as well.

In last year’s budget, the thresholds for determining residential status of a person were changed. Now, any non-resident is considered a resident for tax purposes if the person stays in India for a period of 120 days or more.

The government had issued a circular giving relief to such NRIs by excluding the number of days of their almost forced stay in India while calculating residential status during FY 2019-20, Kumar pointed out. A similar relief or exception should be provided in this year’s budget given that travel continues to be a challenge this year as well, he said.

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