The Budget is around the corner and like every year the salaried class hopes the finance minister announces measures to provide relief. Inflation is high, layoffs in the tech sector have been rampant, and fears of a global recession are around the corner. People have barely recovered from economic distress in the aftermath of the Covid pandemic.
The middle class has been one of the ardent backers of Prime Minister Narendra Modi-led government and in an election year BJP cannot afford to ignore their demands.
The salaried class is the largest group of taxpayers accounting for around 50 per cent of the total income tax (I-T) returns filed in 2022. The ultimate expectation of salaried class is that its net take home salary increases through a combination of one of the measures below:
Increase in income tax exemption limit to Rs 5 lakh
The current limit is Rs 2.5 lakh per annum. Though income up to Rs 5 lakh is practically exempt due to a rebate of Rs 12,500 for people earning more than Rs 5 lakh, this rebate is not available. An increase in exemption limit to Rs 5 lakh for all is likely to result in a savings of approximately Rs 1,000 per month for all taxpayers.
Increase in deduction limit under Section 80C
Section 80C provides deductions on various investments up to Rs 1.5 lakh per annum. The purpose of this deduction is to encourage people to save. The limit should be enhanced by a lakh or so to reward people who are saving more. Principal payment on home loan is included under Section 80C. For any person who has a home loan, he doesn’t get any benefit of investments in PF/ other schemes as housing loan alone subsumes the entire deduction in most cases. This could result in savings of Rs 10,000 to Rs 30,000 per annum depending upon the individual's marginal rate of taxation.
Club home loan principal and interest deduction, increase limit to Rs 3.5 lakhs
If the government doesn’t want to touch the 80C limit, then it could club the interest and principal payment on home loans under Section 24(b), thus increasing the limit from Rs 2 lakh per annum to Rs 3.5 lakh per annum. This could result in savings of Rs 15,000 to Rs 45,000 per annum depending upon an individual's marginal rate of taxation and give a boost to the housing sector. The housing sector has a multiplier effect on the economy, it employs one of the highest labour in the unorganised sector, resulting in an increase in demand for cement, steel, paint etc.
Increase in standard deduction limit
Standard deduction was re-introduced to bring salaried professionals on par with self-employed professionals and corporates who pay tax on profits and not income. They can claim all expenses incurred to earn the income. A salaried person also incurs expenditure on conveyance, food and refreshments, clothing, stationery etc. The current limit is Rs 50,000 per annum. Given the work from home scenario, most salaried persons have to now pay higher electricity bills, internet charges, OTT subscriptions and a WFH deduction of Rs 25,000 should be introduced as a sub-section to standard deduction. This may not be a permanent but a temporary measure for next 2-3 years and can be revisited.
Increase in limit of Section 80D
Currently an individual can claim a deduction for health insurance premium and expense incurred towards preventive health check-up for self, spouse, dependent children and parents for upto Rs 25,000. Given the increase in medical expenses, the limit should be enhanced to Rs 50,000. The pandemic has also shown the need to buy higher health insurance which justifies such a hike in limit.
Increase archaic child education related allowances
The Child Education and Hostel Allowance have remained static at Rs 100 and Rs 300 per child per month, respectively, for over 20 years now. Even accounting for normal inflation, the limits should be increased to Rs 1,000 and Rs 3,000 per child per month, given that inflation in education is much higher than normal / average inflation.
Introduce vehicle loan principal and interest payment as deduction
Just like home loans, the government can look at allowing vehicle loan EMIs as a deduction from income. It could start with a limit of say Rs 1,00,000. This step can boost the sagging fortunes of the automotive sector which has been struggling in the aftermath of Covid and can too have a multiplier effect on the economy.
Rationalise new tax slab structure
New tax slabs were introduced in the Budget 2020, which has lower rates of taxation but there is no option to claim any deductions on house rent allowance, investments, insurance premium etc. This has found very few takers. To make this attractive, the government would need to allow some deductions (not all). However, this may defeat the very purpose of the new regime. In that case, the government should increase the tax slabs (from Rs 2.5 lakh slabs to Rs 5 lakh slabs or reduce the tax rate under each slab to make it comparable with the old regime.
If the government announces some relief for the salaried tax payers then it will give a boost to consumption which accounts for more than 55 per cent of our GDP. A decline in income tax collection can be partially compensated by increased GST collections.
Increase in demand for goods and services, could lead to increase in capacities, leading to employment opportunities and the multiplier effect trickling in. Hope the finance minister shares some good news for the salaried class in this Budget.
Amitabh Tiwari is a SEBI registered investment advisor.
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