By Tarun Garg and Nitish Kohli
The government, on the path of rationalizing tax breaks available to individuals, has incorporated fair usage limits/ capping against certain deductions and exemptions available under the Income-tax Act. Some examples of this in the form are given below:
Limiting the maximum allowable loss from house property(ies) which can be set-off against other heads of income during a given financial year, to INR 200,000
Capping the maximum eligible cost of new asset purchased for claiming exemption on long-term capital gains under Section 54 or Section 54F of the Act, to INR 10 Crores.
The overall objective of the government has been to set a threshold on the widely available tax breaks without removing them outright.
Introduction of the simplified tax regime in Budget 2020, has been a major step towards rationalisation of tax laws and tax breaks. The Hon’ble FM, while introducing the simplified tax regime, had mentioned that there are more than 100 different exemptions and deductions provided under the Act. In the simplified tax regime, the FM had accordingly removed close to 70 of such tax breaks and mentioned that the remaining exemptions/ deductions will be further rationalised in the coming years.
Since then, it has been speculated that, with the introduction of simplified tax regime and in its aftermath to make it attractive among taxpayers, some major tax breaks available under the old tax regime, may get retired soon. In all likelihood, the forthcoming Budget may continue with this trend of optimising tax deductions under the old tax regime while making the simplified tax regime further lucrative by incorporating certain changes, such as:
Reducing the income tax rate to 20% for the income slab of INR 10 lakh to INR 20 lakh and to 25% for income over INR 20 lakh
Reduction in surcharge rate for income group of INR 5 million to INR 50 million
Factoring elevation in standard deduction from INR 50,000 to INR 100,000
Extending rebate under Section 87A to Non-Residents
One of the key deductions which may see some trimming this year could be, the deduction available for donations made to political parties. As per the Act, donations to certain funds and charitable organizations (except to eligible funds and organizations) are already capped at 10% of the adjusted gross taxable income of the taxpayer while computing the allowable deduction. However, there is no such limit on the deduction for donations made to political parties. Donations made to political parties may be brought under a similar capping. Further, one may also see an overall monetary cap (of say, up to INR 500,000) on all donations made during the financial year, in the current Budget.
Another deduction which may see some optimisation in the upcoming Budget could be in respect of interest paid on education loan. As of now, there is no monetary limit on deduction available for interest paid on education loan. The only limitation on this deduction is with regards to the number of years for which it can be claimed. Currently, this deduction is available for a maximum of up to 8 years, including the first year in which the interest payment is made. To create a level playing field for all taxpayers, the government may set a maximum annual monetary cap on this deduction available to a taxpayer.
In summary, while the tax breaks available to individuals under the Income-tax Act might be on the chopping block, their removal by the government may not be immediate. One can expect that the tax breaks commonly available to individual taxpayers such as deduction for provident fund, insurance premiums, pension schemes, principal repayments for housing loans, term deposits and other such small savings schemes etc., may become standardised and rationalised over the years under the old tax regime. The simplified tax regime would continue to become more attractive for taxpayers, luring them away from these traditional tax breaks.
Also read; National Savings Time Deposit Account: Interest Rates, Returns And Tax Benefits
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(The article has been authored by Tarun Garg, Director with Deloitte India with inputs from Nitish Kohli, Associate Director, Deloitte India. Views expressed are author’s personal and do not necessarily reflect the official position or policy of the Outlook Media group or its employees.)
