Basic exemption limit in taxation may be hiked in Budget 2015

Dated 29th December, 2014

Arun Jaitley's maiden budget evoked mixed reactions from taxpayers. While small taxpayers and middle income earners were delighted by the hike in basic exemption and other deductions, high-net worth investors were devastated by the change in the tax rules for non equity mutual funds.

The budget hiked the basic exemption to Rs 2.5 lakh, and increased the annual saving limit under Sec 80C to Rs 1.5 lakh. The basic exemption for senior citizens was hiked to Rs Rs 3 lakh. The budget also increased the home loan interest deduction to Rs 2 lakh a year. To be fair, these changes brought cheer to taxpayers reeling under runaway inflation and high interest rates.

However, the changes in the tax rules for non-equity funds was a damper. The budget increased the minimum holding period for non-equity funds from one year to three years if they were to be treated as long-term assets. The option of paying 10% flat tax on long-term capital gains was also taken away. The tax is now fixed at 20% with indexation.

There were some important clarifications too. The deduction for long-term capital gains from the sale of property can be availed if the gains are invested in capital gains bonds in six months from the date of sale of the house. This investment cannot exceed Rs 50 lakh in one financial year.

However, there was no clarity on the amount of tax deduction on reinvestment in capital gains bonds when a house was sold in the second half of the year. Many taxpayers claimed a deduction of Rs 1 crore by splitting the investment over two financial years. It has now been clarified that the total deduction cannot exceed Rs 50 lakh.

The budget also clarified that the tax benefits on the purchase of a house with the sale proceeds of another property will be available only if the second property is in India. This loophole has been exploited to claim tax benefits even on property purchased abroad.

Even though the effective tax rate in India is quite reasonable, some experts feel the next budget could offer more relief. "There is an expectation that the basic limit might be increased further," says Home Mistry, tax partner at Deloitte, Haskins & Sells. The basic exemption may be hiked to Rs 3 lakh from the present Rs 2.5 lakh. The tax slabs, which were left untouched in the previous Budget, could also be tweaked. This will bring down the effective tax rate further.

Bigger benefits will, however, accrue from another tax reform. The introduction of the Goods and Services Tax (GST) is seen as the biggest ever tax reform. Though it is an indirect tax and will not impact the average consumer directly, you can expect prices of products and services to come down after GST comes into effect.

Though the government expects to roll out the GST in 2016, there is no word on another watershed tax reform. The Direct Taxes Code (DTC) has been hanging fire for several years. Given that DTC has already gone through several modifications, it is likely that the Modi government may come out with a completely new version of the legislation.

Kaushik Mukerjee, executive director and partner at PricewaterhouseCoopers feels the government should look at smaller benefits like deduction for children's tuition fee (Rs 100 per month per child up to two children), conveyance allowance (of Rs 800) and so on.

"These deductions have remained very low even in current times. They should either be hiked or be done away with," he says.

Similarly, the Finance Minister should hike the deduction limit for health insurance premium under Section 80D to more realistic levels.

The present limit of Rs 15,000 annually (for self and family) is too low. Also, the tax free medical reimbursement limit of Rs 15,000 a year should be reviewed. This limit was last hiked by 50% in 1998. After 17 years, a 33% hike to Rs 20,000 is a reasonable expectation.

(This article is published in The Economic Times on 29th Dec, 2014)