Standard Deduction: While introducing the standard deduction of Rs 40,000, in the Union Budget 2018, the Finance Minister observed that a major portion of the personal income-tax collection was from the salaried class. The standard deduction was subsequently increased to Rs 50,000 in the Union Budget 2019. While Consumer Price Index Inflation has moderated to 5.9% in November 2022, it was at a high of 7.4% in September 2022, as compared to 4% in September 2019. Given the rise in the cost of living for individuals and since salaried taxpayers cannot claim a deduction for expenses incurred by them, the government could look at increasing the standard deduction.
80C: As a measure to encourage household savings, certain prescribed contributions to life insurance, provident fund (PF), savings instruments, repayment of housing loan etc., are allowed as a deduction up to Rs 150,000 under section 80C of the Act. The majority of this limit is usually utilised by the contribution to PF and principal repayment of housing loan; thereby leaving other contributions/ spends unutilized. This limit of Rs 150,000 was last revised in the financial year 2014–15. Hence, there is an expectation that the Government may consider revising it to Rs 2,50,000 in the current Union Budget.
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80CCD: Deduction is allowed for contributions to pension scheme of the Central Government (such as National Pension System) as under:
We have seen that the limit of Rs 150,000 is generally exhausted by the deductions under Section 80C and may leave the taxpayers with little/ nothing to claim against their contribution under section 80CCD(1). Largely, they are able to claim only the additional deduction of Rs 50,000 under section 80CCD(1B) for their own contribution to the pension scheme. Hence, to provide some tangible benefit, the government may reconsider increasing this limit for individuals.
80D: An individual can claim deduction of Rs 25,000 for health insurance premiums paid for insuring the health of self or family, and Rs 25,000 for health of the individual’s parents. If insured is a resident senior citizen, the limit will be Rs 50,000. Medical expenses for resident senior citizens are also allowed as a deduction up to a maximum of Rs 50,000 if they do not have a health insurance. Medical expenses have substantially increased over the years especially due to the global pandemic. This has necessitated opting for health insurance plans with higher coverage and resultant higher premiums. Hence, it would be beneficial for individuals if these limits are increased.
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Children Education allowance: Children Education Allowance and Hostel expenditure allowance are exempt up to Rs 100 and Rs 300 per month respectively. These limits set in August 1997 continue till date. As compared to the high expenses that are incurred on school and hostel fees in the present day, the current limits are insignificant and there is a need to revisit these exemptions.
Deduction for interest paid on self-occupied house property: The limit of Rs 2,00,000 for deduction of interest on housing loan for a self-occupied property was set in financial year 2014-15. The interest on housing loan is now much higher with increase in interest rates. Further, additional deduction of Rs 1,50,000 for interest on housing loan is available to taxpayers only if stipulated conditions are met. Hence, there is an expectation that this limit will be increased to at least Rs 3,00,000 to give some relief to taxpayers. Another associated relief that could be brought in is the removal of the cap of Rs 2,00,000 on set-off of loss from house property against other heads of income.
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The case for a rejig in the limits is strengthened when one compares these to other countries – to take a few examples, countries such as Singapore and Germany provide for various deductions for individual taxpayers. Singapore has child relief of SGD4,000 per child, spouse relief of SGD2,000, dependent parent relief of SGD9,000 etc. These deductions are in addition to earned income deduction in the range of SGD1,000 to SGD8,000. Similarly, Germany provides for children allowance of EUR227.50 per child per month and 30% deduction for school fees subject to a cap of EUR5,000 per child. These limits are much more in tune with current inflation and cost levels.
In addition, many countries provide for standard deduction/ personal allowance for individuals and some countries also permit employees to claim a deduction for the expenses incurred wholly in performance of duties and expenses incurred in working from home.
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The ask for changes in these limits has been coming up in the past few years as well and while the government has been making a few changes and also introduced the concessional tax regime, a greater emphasis to relook at both the limits and the types of deductions/ exemptions is the need of the hour.
(Surabhi Marwah is Tax Partner, People Advisory Services, EY India. Ammu Sadanandhan, Director, People Advisory Services, EY India also contributed to the article. Views expressed are personal)