Personal income taxpayers are looking for a hike in deductions under various sections and a reduction in the tax rate. Either the government may give one or the other, or partly both. The moot question is: which one the government should prioritise from the public policy perspective?
If the tax rates are reduced, consumption may increase and thereby increase the capacity utilisation. However, the capacity utilisation in the last four quarters has been 70-75 per cent, which is reasonable. However, the input costs are relatively high which make it difficult for our products to compete in world trade. Investing in capital assets will help bring down logistics and other input costs and, thereby, reduce production costs by a few percentage points. This would also boost our GDP growth significantly.
Apart from private players, the government has at least two ways to achieve higher capex. One is to retain the personal income tax rates with a few concessions, and thereby generate more revenue. The other is to increase the deductions substantially and, thereby, allow the taxpayers to invest in schemes that empower them; the receipts from the deductions can be used for augmenting capex.
As per Section 80CCE, the combined maximum limit for deduction which can be availed of under Sections 80C, 80CCC, 80CCD (1) and 80CCD (2) is ₹1.5 lakh. The investment options may be categorised into secure but low return (PPF, tax saving FD and NSS, each up to ₹1.5 lakh), futuristic (Sukanya Samriddhi Yojana up to ₹1.5 lakh for one or two girl children), high risk, high return (ELSS funds and ULIP, each up to ₹1.5 lakh), financial security after retirement (NPS up to ₹1.5 lakh), constructive spending (tuition fees for children’s education).
The investment in Sovereign Gold Bond (SGB) has not been included in Section 80C so far. Including SGB under 80C would give impetus to the future tranches of SGB. The forex saved thereby may be utilised for importing items that give a higher multiplier effect. The term insurance has been the new normal against life and disability risk and should be brought under 80C. The deduction limit under 80CCE sections is too restrictive and it should be raised to at least three times that of the present limit of ₹1.5 lakh.
Despite paying income tax heavily during their active economic life, taxpayers don’t get anything in return during their retirement life. It remains a one-way path. It is not possible for the government now or in the next decade to provide social security to the taxpayers in proportion to the income taxes paid. However, the government should allow the honest taxpayers to save substantially for their future under NPS. The contribution towards NPS may be separated from Section 80C and then raised to, say, ₹2 lakh per annum under 80CCD(1B).
With claims exceeding the premium during Covid times, insurance companies have increased the premium much beyond the permitted deduction limit. The Pradhan Mantri Jan Arogya Yojana (PM-JAY) is only for about 10.74 crore poor families. The rest must rely on medical insurance schemes. The limit for deductions under Section 80D should be doubled to ₹50,000 for non-senior citizens and to ₹1 lakh for senior citizens.
The deduction under Section 80GG for those who live in rented houses has remained at ₹50,000 for many years, despite increased house rents. It should be doubled.
Given the mercurial nature of employment and economic activities, an individual taxpayer should have at least six months’ salary in savings bank (SB) account. At an interest rate of 5 per cent (with multi-option deposit), the interest on an SB savings of ₹6 lakh would be about ₹30,000. There is a need to revise the deduction permitted under Section 80TTA to about ₹30,000 from the current limit of ₹10,000.
The mental trauma and physical effort involved in rehabilitation of handicapped dependent relatives and those who suffer from critical illness cannot be compensated easily. Different illnesses demand different levels of expenditure, either for handicapped dependent relatives or for those who suffer from critical illness.
The government should be liberal in enhancing the deduction limits under 80DD from ₹75,000 for disability of 40-60 per cent to ₹1.5 lakh and ₹1.25 lakh for disability of 80 per cent or more to ₹2.5 lakh. Under Section 80DDB, the deduction for treating critical illness of the taxpayer and his dependents is ₹60,000 for non-senior citizens and ₹80,000 for senior citizens and this should also be doubled.
Although the impact on the exchequer from these revisions is minimal, the message would be strong from the government that it empathises with all those who take responsibility for maintaining dependent relatives and those who undergo treatment for critical illness from their savings.
If the aforementioned deductions are incorporated in Budget 2023-24, it may result in deductions of ₹10 lakh for individual taxpayers — so it be. By allowing such deductions, the responsibility for well-being of the family and saving for their future would lie with the taxpayer. Governments in the West that took responsibility for the well-being of individual citizens have failed miserably, with social security schemes bleeding government finances.
While the old scheme permitted all the deductions, the new one did not allow deductions but reduced the tax rates. The taxpayers seem to prefer the old scheme. Indians prefer to invest in tax saving schemes and constructive spending like health insurance premiums, children’s education, term insurance and pension schemes. This is a good sign for the government, as otherwise the responsibility would fall on it.
The investment in various financial instruments by the taxpayers would be used as capex , both by the government and the private players. Increasing deductions are a much better option than reducing the income tax rate. This would be a win-win formula for the government and taxpayers alike.
The writer is a public finance analyst