Budget 2020-21: Finance Minister Nirmala Sitharaman is expected to come up with certain proposals in the Budget 2020 that may leave more income in the hands of taxpayers, especially salaried individuals. If the income tax slabs are expanded, individuals’ tax liability will come down. If the same taxpayer is going to be taxed at a lower rate of tax than before, the savings in taxes will increase the take-home pay of the salaried. Further, if the salaried is provided with additional tax saving options, it will not only reduce the tax out-go but also help in meeting the long-term financial goals of the taxpayers.
"Scheduled to be presented in February, the Budget 2020 shall surely be an exciting one. While each year the government aims to rationalise the provisions of the direct tax laws to improve tax collection, minimise litigation, increase compliance and reduce unnecessary burden on the taxpayers, this time the hopes of individual taxpayers are exceptionally high. Post the enactment of the ordinance that introduced corporate tax rate cuts, the individual taxpayers are hoping for similar fiscal benefits," says Sandeep Jhunjhunwala, Director, Nangia Andersen LLP. In an e-mail interview with FE Online, Jhunjhunwala shared his expectations from the Union Budget 2020-21.
Is the salaried middle class getting short-changed?
The so-called 'middle class' is that section of the population that has less income and huge tax burdens. As per the current slab rates, individuals below 60 years of age, earning between Rs 2.5 lakh and up to Rs 5 lakh are required to pay tax at the rate of 5 per cent in excess of Rs 2.5 lakh. Whereas, taxpayers earning income between Rs 5 lakh and up to Rs 10 lakh have to pay tax at the rate of 20 per cent. The steep jump from 5 per cent to 20 per cent for income above Rs 5 lakh is harsh on the salaried taxpayers who get their salary after-tax deduction, without taking into account any expenses they incur. Additionally, in view of the inflationary trends in the economy, individuals are left with less expendable income.
Can the salaried middle class expect any respite in Budget 2020?
The government is thus expected to address the woes of the individual taxpayers in the upcoming Budget 2020. The task force set up to formulate the Direct Tax Code (DTC) has recommended widespread changes in the personal tax slabs. Accordingly, the Budget 2020 might widen the tax slabs while retaining the basic exemption limit of Rs 2.5 lakh. It is expected that in line with the recommendations of the task force, the first slab will be widened to include taxpayers having income from Rs 2.5 lakh to Rs 10 lakh and the same may be taxed at the rate of 10 per cent. Another slab has been proposed to be introduced for the income group ranging from Rs 10 lakh to Rs 20 lakh having tax rate of 20 per cent. This would offer respite to the middle class by leaving more disposable income in their hands.
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As per your expectations, how are the high earners going to be taxed?
Currently, the peak rate of tax of 30 per cent is charged on individuals having an income of Rs 10 lakh or more. However, the income level on which peak rate is applied is significantly higher in other countries. Moreover, the income level is also not in line with the cost of living. Thus, the Budget 2020 may raise the income level on which peak rate is applied to Rs 20 lakh. The task force has also recommended the insertion of a fourth slab, to tax the super-rich having income more than Rs 2 crore at the rate of 35 per cent. Despite the high tax rate, this group shall also benefit owing to the widening of the lower slabs.
Will an expansion in personal income tax slabs help in economic growth?
With more expendable income in the hands of the taxpayers, there would be an upsurge in the purchasing power of the individual taxpayers, leading to higher consumption and flow of money into the market. This shall go on to enhance the growth rate of the economy, which is currently facing a slowdown.
Should salaried individuals be given more incentives to save tax? What could be the changes expected in Section 80C?
The Income Tax Act offers benefits in the form of deduction of expenses to those carrying on business and profession. However, the salaried class pays taxes on gross salary only. Further, the standard deduction of Rs 50,000 does not provide any sizable relief as the same is counterpoised by the removal of transport allowance and medical allowance. This incongruity must be removed to bring consistency between the salaried employees and businesspersons, as the salaried individuals, too, need to incur expenses to keep up with the transformations in their work environment. Also, a fixed standard deduction for all the levels of a salaried class is unfair, the same should increase with an increase in the level of income.
The average expenditure to meet the expenses of education, health, travel and living have gone up ominously. Accordingly, the allowances and concessions for the salaried class, offered under the Income Tax Act are woefully inadequate. For instance, the Children Education Allowance (CEA), which is very low to be of any relevance. This CEA limit should be raised from Rs.100 per month to at least Rs. 1,000 per month per child for maximum of two children, or actual expenses, whichever is less.
Further, tax-efficient saving options like Section 80 C also comes with a ceiling limit. The overall cap of Rs 1.5 lakh, which applies jointly to three Sections, is not enough. Further, owing to the fact that the multiple reliefs are huddled under a single Section, the taxpayers are not able to realise the benefits fully. It is thus necessary that Section 80C be overhauled. Enhancement of ceiling limit would not only benefit the individual taxpayers but also help the government channelize the taxpayers' funds in the desired areas of investment.