Dependants’ allowance is one of the tax reliefs middle class taxpayers should receive. Several countries such as Malaysia and the UK practise this, albeit under different names.
As it is, a bachelor and a middle-aged person earning Rs 10 lakh pay the same tax, assuming both use tax shelters to the same extent. At first glance, one may not see any inequity in this. But on a deeper reflection, it would be evident that the middle-aged individual deserves greater indulgence from tax laws as many others live off his income.
That is precisely why many countries give family allowance to ease the tax burden of people supporting family members. It is time India too introduced this allowance. It is not enough to allow a separate deduction towards medical insurance premium for those taking care of the medical needs of their parents. Food, clothing and shelter too must figure prominently in tax computations, the raison d’être behind personal allowance. Nor is the across the board tax-free threshold of Rs 2 lakh enough.
A new scheme A personal allowance of Rs 5,000 per month per person in a family may not be too much to ask. In order to use fiscal policies as family planning tool as well, such allowance may be restricted to just two dependent children a la the exemption to long-term care benefit given by the employer being restricted to just two children in the family. In addition to two children, the other members of the family who should make the grade are one spouse and parents, all of whom, of course, should be dependants of the taxpayer. Thus, in the example on hand, the bachelor would get a personal allowance of Rs 60,000 per year and the maximum that could be knocked off for those supporting dependants would be Rs 3,60,000 (a family of six).
As a logical corollary, bachelors must be rewarded more for greater savings. To be more precise, they should qualify for, say, Rs 2 lakh as deduction under section 80C as opposed to the present one-size-fits-all amount of Rs 1 lakh. This is just the outline of the scheme which can be fleshed out once policymakers okay this humane demand.
Only for the deserving One must make schemes such as this as fool-proof as possible. Quotation of the Permanent Account Number (PAN) of each dependent member the taxpayer is supporting must be made the precondition for grant of personal allowance. This would ensure that no ghosts are added in the list of dependants.
Furthermore, it would also alert tax officials to act, should such dependants have their own sources of income. It would also enable pro rata claim of this tax benefit if siblings are taking turns to support their parents.
Personal allowance ought to be granted only in deserving cases. Thus those having a taxable income of more than Rs 10 lakh should be kept out, which, once again, can be done through suitable programming. Of course, a very large number of people would make the grade given the fact that only a minuscule section of the taxpaying populace files returns showing income in excess of Rs 10 lakh.
The point is the grant of personal or dependants’ allowance could result in loss of considerable revenue. To make up for this, the finance minister can introduce a new slab of income exceeding Rs 25 lakh for which the tax rate may be 35 per cent. In that case, the super-rich surcharge of 10 per cent introduced last year on taxpayers with income in excess of Rs 1 crore will have to go.
Lastly, those claiming the personal allowance must be read the riot act — any misuse of it wittingly or unwittingly shall invite a deterrent and exemplary penalty even if the fault lies with the dependants. For example, if the parents are at fault by not paying tax despite having taxable income and PAN, their children claiming dependants’ allowance would be penalised.
(The author is a New Delhi-based chartered accountant)