Finance Minister Nirmala Sitharaman has already indicated that the Union Budget 2021 will be a kind of a palliative for the common man. What people generally prefer is tax sops as it helps them bring down their effective outgo and increase disposable incomes. In the last one year, disposable incomes have been hit by falling income levels, job losses and higher inflation.
To an extent, it must be said that inflation has been addressed with the CPI inflation falling to 4.59% in Dec-20 and food inflation falling closer to 3.5%. The one step that the budget can take is to offer more tax sops to put more money into the hands of the middle class. They essentially form the backbone of the Indian economy as far as the consumption demand is concerned. Here is what the budget can do to help the common man.
Increase the tax exempt limits
Currently, incomes up to Rs5 lakhs are exempt by way of a rebate that is tad complicated. For example, if the net taxable income of an individual comes to Rs5.40 lakhs, then their tax calculation starts from the level of Rs2.50 lakhs. That is actually unfair. Any person earning over Rs2.50 lakhs has to file tax returns, which is tedious. Here is what the budget can do.
Firstly, the exemption limit can be directly raised to Rs5 lakhs and mandatory tax filing should be applicable only if total income crosses Rs5 lakhs per year. That will reduce the burden on the tax authorities. Secondly, it is time to make tax rates more realistic. It can be 10% up to Rs20 lakhs, 20% up to Rs50 lakhs and 30% beyond that. The amount of additional money it will put in the hands of people will give an immense consumption boost.
Exemption limits under Section 80C to be enhanced
The Section 80C exemption has just about increased from Rs1 lakh to Rs.150 lakhs in the last 18 years. It is time to peg this limit at minimum Rs2.50 lakhs and enhance the existing benefit of NPS from Rs50,000 to Rs1 lakh. Apart from NPS, all pension products can be included under that category so individuals have a manoeuvrable limit of Rs3.50 lakhs to manage investments and retirement planning.
Currently, withdrawals only up to 60% of the corpus are exempt under NPS, which puts it at a disadvantage with respect to PPF and CPF. To begin with, Budget-21 can offer 100% exemption on withdrawal of NPS funds.
Section 24 limit on house property should be more realistic
Currently, Section 24 provides exemption on interest on home loans up to Rs2 lakhs per annum. If you consider the prices of property even in tier-2 cities, this exemption is grossly unrealistic. To begin with, this exemption limit must be raised to Rs3 lakhs with a commitment to automatically enhance the limit to Rs5 lakhs after 3 years. The benefits to low-cost housing are more than to middle income homes and defeat the entire purpose. A more liberal exemption will encourage people to invest in their own property.
Today, the principal portion is included under Section 80C and the interest portion under Section 24. This becomes unviable towards the latter part of the loan when the principal amount increases. Instead, the Section 24 should be extended to interest and principal jointly to make things simpler.
Time to hike the limits of standard deduction
The government re-introduced standard deduction as Rs40,000 in the first tranche and currently it is Rs50,000. However, there is a catch. This standard deduction was introduced in lieu of medical and transport reimbursement. Hence the net benefit was limited. Hence, to compensate taxpayers, the standard deduction must be ideally hiked to Rs1 lakh, which is what the finance minister has been mulling. Such a move would compensate for benefits forfeited and also ensure that incomes up to Rs6 lakhs become fully tax-free.
How about a special COVID relief as a special case?
It is now almost axiomatic that the government will try to enhance revenues to combat COVID. It has taken a huge fiscal hit in the current year and will have to spend heavily in the coming year for vaccination distribution, logistics, procurement, subsidies etc. It is very likely that the government will look at a special COVID cess. While it would be a kind of indirect tax, it is likely to hit the entire population through higher cost of goods and services.
One thing the budget can do is to partially compensate people by providing them a special tax exemption up to a certain limit for amount spent on COVID treatment during the year. It can be a time-bound exemption but would provide relief to people in these trying times. In a tough year, if that relief comes from the budget, it will sure feel like manna from heaven.