The Task Force drafting a new Direct Taxes Code may recommend replacing various tax-free perquisites that salaried tax payers currently enjoy with a higher level of standard deduction in a bid to make taxation of salaries less complex.

Such a move will be in line with the Budget decision to replace reimbursement of medical bills and transport allowance with a standard deduction of ₹40,000. Leave travel allowance, which enables allows people to claim deduction for domestic travel twice in a block of four years, may too get scrapped.

The same Task Force is also expected to recommend Exempt, Exempt, Tax (EET) regime be applied on all savings and investment that are meant to provide social security to individuals after retiring from active employment. The Task Force is scheduled to submit its report before the end of May.

These proposals are not entirely new. Such recommendations had been made by the committee that had written the Direct Taxes Code, 2009. However, these proposals and particularly the recommendation on EET regime were opposed by tax payers.

Easier compliance

Sources in the Task Force explain that replacing multiple tax-free perquisites with a generous deduction will make compliance with income tax law easier for individuals and curb instances of people producing fake bills to claim the benefit. Producing fake medical bills to claim the ₹15,000 annual reimbursement was commonplace across the country, these sources pointed out.

Other tax-free perquisites enjoyed by the salaried include reimbursement of bills for telephone, newspaper, periodical and books, interest-free loans from employers, medical insurance paid by employers, rent free accommodation and club membership paid for by the employer.

Removing such tax-free perquisites is considered an effective measure to bring equity in the burden of taxes borne by various income classes and reduce evasion through smart tax planning of corporate compensation packages.

The EET regime, which had kicked up a lot of controversy when the draft Direct Taxes Code was made public in 2009, allows tax exemption for investments and earnings in notified savings schemes for social security such Provident Funds, insurance policies and pension plans, but taxes withdrawals.

A Task Force source felt the EET regime needs to be better understood by people as it incentivises savings and discourages large withdrawals post retirement. The tax regime will encourage people to make small withdrawals from the accumulated savings, based on their requirements to meet various expenses and thereby keep the withdrawals within the lowest tax slab. Smaller withdrawals will ensure that the individuals have some savings to last their lifetime.

The same proposal in the 2009 code had run into trouble as it did not recognise that many Indian families use retirement benefits to pay off home loans and for wedding expenses of their children. Also, hospitalisation may necessitate large withdrawals. The Task Force will therefore have to make certain concessions on withdrawals for such expenses if EET is to become acceptable.

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