The Finance Minister is set to present a paperless Union Budget on February 1, 2021, and has her task cut out given that the fiscal year 2020-21 has been challenging and unprecedented for the government as well as the common man. While the government has made several efforts to provide relief through stimulus packages, this year is a bigger test as they will have to master the balancing act of managing the burgeoning fiscal deficit and the expectations of the taxpayers.
Some focus areas and changes that are expected are set out below:
1. Tax incentives to boost spending
Given that travel was at an almost complete halt in 2020 and some historical tax breaks existed for actual travel (typically called Leave Travel Concession or LTC), the government had introduced a scheme to provide tax relief if an individual instead of travelling, bought goods or availed services during the period October 12, 2020, to March 31, 2021. These goods and services should be subject to GST of 12% or more and the payment should be made through digital modes. The deemed LTC fare (as this tax relief is called) is up to Rs 36,000 per person for non-central government employees and to avail tax exemption the individual has to spend 3 times the deemed fare.
To boost consumer demand in the economy, it is expected that the Finance Minister may extend the LTC cash voucher scheme from March 2021 to the fiscal year 2021-22. This is more so because it would take time for actual travel to come back to its thriving avtaar.
2. Expanding the scope of Section 80D – Deduction for Medical insurance premium/ expenditure
The existing tax laws allow individual taxpayers to claim a tax break on medical insurance premium paid for themselves and for family.
Considering the present situation, the common man expects the Finance Minister to liberalise provisions of section 80D and expand its scope to include medical expenditure incurred by taxpayers on COVID-19 or any other ailment , without the restriction of age or availability of medical insurance. Further, the limits currently prescribed (Rs 25,000 to Rs 100,000 which depend primarily on the age of the individual and the coverage of family members) under section 80D are not in-line with the likely expense that an individual may incur. It is an ask that the overall limit be increased to reflect the on-ground reality.
3. Long term capital gains tax
Equity markets are at an all-time high and have rebounded since the fall at the start of the COVID-19 outbreak. There is a strong argument for not tweaking the tax rate on long term capital gains (earned from sale of shares on a stock exchange platform or equity mutual funds). However, the government, in order to garner additional revenue, may look to increase the rate of tax on such capital gains from the existing 10%. Further, the tax rate on gains earned from sale of house property may be increased for taxpayers who own more than two properties.
A long standing ask that perhaps has become more topical in the last year is a change around the taxation of employee stock option income – i.e., deferral of taxation to the event of sale of shares instead of taxation at the time of allotment of shares. This will ensure more liquidity in the hands of individuals, especially with salary cuts substituted with stock options.
4. Re-introduction of tax-deductible infrastructure bonds
There is also a debate that the government may re-introduce tax deductible infrastructure bonds, where taxpayers who subscribe to bonds will be eligible to claim deduction of such investment (subject to certain limits) from their gross income. This will serve the twin objective of providing a tax benefit to taxpayers as well as much needed inflow for the government to boost the infrastructure sector.
5. Estate duty/ inheritance tax
Another topic which is much debated is the introduction of estate duty or inheritance tax. Since 1985, when estate duty was abolished, every now and then the debate of re-introduction does come up. However, it is unlikely that such a levy will be introduced in the current Union Budget due to the severe impact of COVID 19 on individuals/ businesses.. There is also talk of imposing some tax or duty on high end luxury goods but given that the surcharge rates were just increased in 2019 (making the top tax rate 42.7 per cent), this again would need a lot of thinking, in terms of perceptions vs actual revenue collections.
The FM has her task cut out – this year is tougher than most and there are several issues of debate apart from taxes or other matters that impact an individuals’ personal finance – eg the proposed labour codes where there could be a likely impact on net-take home. What we can perhaps say is that with the fiscal deficit the expectation of reliefs, cuts and sops is not quite reasonable but one can only predict – Feb 1 will be the day to watch out for.
(Surabhi Marwah, Partner – People Advisory Services and Co-Leader – Private Client Services, EY India. Aditya Modani, senior tax professional with EY India has also contributed to this article. The views expressed are personal.)