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Monday, February 15, 2010

Direct tax: no great expectations

It is that time of the year when we gear up and submit suggestions to the finance minister for his consideration in the upcoming budget. From the direct tax perspective, there are no high expectations from the budget this year because of the much-awaited Direct Tax Code proposed to be effective from April 1, 2011. The current tax regime is just a stopgap arrangement for this year and, thus, all amendments in the present law will be short-lived.

From the direct tax perspective, a few aspects that the common man may look forward in the upcoming budget are:

Rationalisation of the income tax exemption limit and tax slabs: In India, the income level on which tax at a maximum marginal rate is levied, is far lower compared with a large number of developing and emerging economies. On the other hand, the prices of essential commodities are skyrocketing. Therefore, relief must be provided by attempting to reduce the prices and also by ensuring more disposable income to counter the problem of inflation. The most impeccable solution would be to enhance the basic exemption limit and the income slabs as shown in Table 1.

Increase in the conveyance allowance limit for employees: At present, conveyance allowance is exempt up to Rs 800 per month. With the increase in fuel prices, this threshold should be increased in the range of Rs 3,000-3,500. Similarly, there is a need to rationalise the exemption limit for children education allowance, hostel expenditure allowances, etc.

Increase in gratuity limit: Under the existing law, gratuity received by a non central government employee to the extent of Rs 3.5 lakh is tax free. For central government employees, the exemption is Rs 10 lakh. There have been various representations to the government to increase the exemption for gratuity to Rs 10 lakh for all.

Enhance the quantum of deduction under section 80C: The government should give more emphasis on savings to secure life after retirement and such impetus can be given by increasing the quantum of deduction to Rs 3 lakh from a meagre Rs 1 lakh.

Enhance the exemption limit on medical benefits: Exemption of expenses incurred on medical treatment and reimbursed by employer should be raised from Rs 15,000 yearly to at least Rs 30,000 yearly.

Discrepancy in the age for senior citizens: The discrepancy in the age for senior citizens specified under the income-tax legislation (65 years) and other government departments (60 years) should be removed. Such a measure would help to avoid hardships on people retiring at 60 but paying high taxes on pension till the age of 65.

The common man’s wish list is endless and the irony is that all of these have now become a necessity. The finance minister has a tough job as he has to consider the prospects and consequences of each amendment and then take a decision that suits the larger national interest. However, it won’t be apt to expect that all these will find a mention in this year’s budget. Even if some do make their way, it will be a great relief!