Mukesh Patel.in
practical tax & investment planning online
international tax expert / columnist / author / speaker

KEEP PACE WITH THE TIMES MR. FM!

Revise age-old exemptions linking them with cost inflation index & rationalize TDS threshold & rates!

Lord Vishnu, in his ‘Vaman Avtar,’ sought just three steps of land from Raja Bali and in the process covered ‘Triloka.’ On the eve of Budget 2013, if God were to ask me to make it even shorter and seek just one wish to be fulfilled by the FM for the Indian taxpayer today, I would promptly plead ‘grant real time reliefs!’

       Waiting for the Lord to say ‘Tathastu,’ I would immediately sit down to work out the bounty I would have reaped for the Indian taxpayer and rejoice in joy! Let me explain how. As clear from the accompanying chart, if a taxpayer in the maximum tax bracket of 30.9% were to enjoy even five limits of exemption/deduction under the Income-tax Act in respect of housing loan interest, savings u/s. 80C, medical reimbursement, transport allowance and children’s education allowance (the latter three in the case of a salaried), on the basis of the adjusted amounts in tune with the index of inflation as announced for computation of capital gains, he would right away reap a healthy tax saving of over Rs.1,45,539.

 


How a Taxpayer is deprived of Real-time Tax Relief of Rs.1,45,539?

 


Item of Exemption/Deduction

Static Since

Static Limit

Rs.

Revised Limit

Rs.

Difference

Rs.

Housing Loan Interest u/s.24

1999

1,50,000

4,00,000

2,50,000

Savings Limit u/s. 80C

2001

1,00,000

2,50,000

1,50,000

Medical Reimbursement

1998

15,000

50,000

35,000

Transport Allowance

1997

9,600

36,000

26,400

Children’s Education

1997

2,400

12,000

9,600

   

2,77,000

7,48,000

4,71,000

Note: Real-time Tax Relief of Rs.1,45,539 is computed on the basis of tax at 30.9% on the difference of Rs.4,71,000 of exemptions/deductions due to a tax payer, if the relevant limits had not remained static, but were revised keeping in pace with inflation.

       


While the Cost Inflation Index (CII) is annually revised for purposes of computing capital gains with a view to insulate tax payers against the rising impact of inflation and the falling value of the rupee, the dire need for periodically updating the monetary limits for various exemptions and deductions prescribed under the Income tax Act has simply not been realized!

Even Parliament’s Standing Committee on Finance headed by former FM Shri Yashwant Sinha, in its Report on the Direct Tax Code recommended that, “Almost every year, the exemption limit is being tinkered with, albeit marginally. This, however, does not have any linkage with the price index or the growing inflationary trend. The Committee would, therefore, desire that there should be a built-in mechanism embedded in the statute itself based on Consumer Price Indices, whereby the tax slabs would be automatically and periodically adjusted for inflation. This would bring inherent stability in tax rates and structure, while minimising the burden of tax planning. Such a tax regime based on moderate rates would not only bring fiscal stability but also lead to much higher compliance and revenue collections in the long run.”

MAKE TDS LESS TEDIOUS

With nearly 65% of the personal income-tax collection in India being raised through tax deducted at source (TDS), the onerous task of which has been cast on tax deductors, the TDS provisions need to more tax friendly and not as ‘tedious’ as they have remained over the years.

It is indeed pathetic that a number of annual threshold limits in respect of TDS have just not come to be revised over the years. With the liability of TDS being attracted on such tiny annual limits of Rs.2,500 in respect of payment of interest on securities and on interest on NSS accounts, Rs.5,000 for payment of interest on private deposits and commission or brokerage, just imagine the enormous work that goes into compliance of these provisions. These puny limits call for an urgent review and need to be revised to atleast Rs.25,000.

Moreover, the dire need for rationalization of TDS rates, with the restructuring of the Income-tax rates over the past few years has also been sadly overlooked. To illustrate, in FY 2004-05, taxable income of Rs.5,00,000 attracted income-tax of Rs.1,24,000 at an average rate of tax of 24.8%. In FY 2011-12, the same income of Rs.5,00,000 attracts income-tax of only Rs.30,000, with the average tax rate working out to just 6%. Even under this changed scenario, the rate of TDS on interest has continued to remain at 10%.

Today, the average tax rate of 10% gets attracted only on taxable incomes beyond Rs.7,00,000. As a result, majority of the investors having interest incomes below this limit are required to claim sizable income-tax refunds and the Income-tax Department is also required to collect taxes in a very large number of such cases, merely to refund a substantial chunk alongwith interest thereon.  

If the TDS rate on interest paid to individuals and HUFs u/s. 194A is scaled down to 5% in place of the prevailing rate of 10%, it can go a long way to avoid a lot of unproductive work and waste of time and money.

 

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