The budget will be presented on 5th July by the first full time woman finance minister. As a writer on income tax matters, I wish to pen down expectation of common tax payers from her.
Changes in the tax rates
The finance minister should retain the initial income tax slab of 5% for income between 2.50 lakhs to 5 lakhs. However as the next tax slab for income between Rs. 5 lakhs to 10 lakhs which is very steep 20% after the initial slab of 5%, I request the finance minister to reduce this present tax slab of 20% to 10% to make it progressive and smooth. The finance minister should shift the tax slab of 20% to the tax payers with income between 10 lakhs to 25 lakhs. Since for 99% of the companies, the tax rate is 25%, the government should reduce the maximum marginal rate from present 30% to 25% and tax the income beyond 25 lakhs @ 25%.
As per the Laffer’s Curve higher the rate of tax a government levies, lower is the aggregate tax collection. The slab rates suggested above will in help the government generate more revenue the long run as people are willing to pay tax levied at such nominal rates as long as it does not affect their standard of living.
Marginal relief for individual tax payer with slightly higher income over 5 lakhs
Individual tax payers who are resident of India are entitled to claim a rebate of upto Rs. 12,500/- provided their total taxable income does not exceed the threshold limit of Rs. 5 lakhs. However once the income crosses the magic number of 5 lakhs, their tax liability suddenly increases by 12,500/- even if their incremental income over Rs. 5 lakhs is less than 12,500/- Such people are worse off just because their income is slightly higher than 5 lakhs.
Presently all the tax payers who have to pay a surcharge if their income exceeds Rs. 50 lakhs have the benefit of marginal relief as provided in the respective Finance Act though the same is not part of the Income Tax Act. As per the marginal relief provisions as contained in Finance Acts, the incremental tax liability, due to levy of surcharge, in no circumstances shall exceed the incremental income over the threshold limit of surcharge of Rs. 50 lakhs
Presently, there is no such provision for providing marginal relief to the tax payers whose income exceeds Rs. 5 lakhs by just few hundreds. This provision of marginal relief if introduce in the Section 87A will check the tendency of taxpayers to manipulate their income level in case it just happens to be marginally higher than the threshold limit of 5 lakhs to avoid payment of such higher tax than the incremental income.
Relief to the home buyers
As per the tax laws any person who has taken a home loan for acquiring a house for self occupation is allowed to claim interest only upto Rs. 2 lakhs irrespective of the amount of interest paid. Any excess interest paid is not eligible for any tax benefits. Presently a person is allowed to have two self owned properties as self occupied but the interest claim is restricted to Rs. 2 lakhs for both the properties taken together which is not correct. A person should be allowed to claim proportionately higher interest in case he has more than one self occupied house property. However if the property is let out, you can claim full interest subject, however, to restrictions on your eligibility to claim set off of loss under this head which is restricted to Rs. 2 lakhs against other incomes. In my opinion the provisions should be the other way round. The person who buys the house for his own occupation should be allowed to claim full deduction of interest and the person who tries to play tax arbitrage by taking a home loan should be allowed limit amount of interest to discourage such abuse of the tax laws.
Presently a tax payer is allowed to set off only upto Rs. 2 lakhs any loss computed under the head “Income from House Property” arising due to claim of interest on home loan or money borrowed for the purpose of purchase/construction/repair/renovation of a house. In my opinion this limit of just insufficient looking at the amount of interest to be paid on home loan taken to buy properties specially in urban area. This limit should at least be raised to Rs. 5 lakhs.
Since only loss upto 2 lakhs is allowed to be set off against income of the current year, any loss beyond Rs. 2 lakhs under the house property head for the year is required to be carried forward for set off against income under the same head for eight subsequent years. Since home loan is a long term product and the probability of a home buyer with home loan having a positive income under the head is negligible for these eight subsequent year unless he prepays the home loan, I would suggest that the Finance Minister should rationalise this carry forward provision and make it eligible for carry forward for unlimited period so as to grant the intended benefit.
Hope some of the suggestions are accepted by the finance minister.