04 Feb 2018 15:57 IST

Salaried taxpayers have little to gain

The Finance Minister gave some relief to the salaried class, only to nullify most of it

“Expectations are always the cause of misery”, reminded Finance Secretary Hasmukh Adhia in a post-Budget interview. Individual taxpayers who had high expectations have reason to be disappointed with Budget 2018.

Pretty little has changed and their high hopes of big tax breaks have remained just that. The Finance Minister did not make any change in the structure of income tax for individuals. He gave some relief, only to nullify most of it.

Here’s how. Conceding a widely voiced demand, the Budget has allowed standard deduction on salary income up to ₹40,000.

But then out goes the tax exemption on medical expense reimbursement (₹15,000) and transport allowance (₹19,200) — totalling ₹34,200. In effect, the taxable income reduces by just ₹5,800 a year for salary earners who get medical and transport allowance.

This group generally comprises those below 60 years of age. On the reduced tax income of ₹5,800, the tax benefit, excluding cess, is the range of ₹290 (for those in the lowest 5 per cent slab) to ₹1,740 (for those in the highest 30 per cent slab). And this little benefit too is chipped away by the increase in cess on total tax.

Education cess, currently 3 per cent of tax, has been replaced with Health and Education cess of 4 per cent of tax.

The outgo due to higher cess could, in fact, be more than the tax saved in the case of high salary earners, resulting in net tax outgo. For instance, for a salaried individual less than 60 years old earning ₹18 lakh a year, investing ₹1.5 lakh in Section 80C tax-saving instruments and paying health insurance premium of ₹25,000 eligible for tax break under Section 80D, the tax outgo will increase by ₹1,190 after Budget 2018.

Benefit of standard deduction

The tax benefit though is better for salaried taxpayers who do not get medical and transport allowance. This group generally comprises those aged 60 or more and earning pension income. With no disadvantage from removal of tax exemption on medical and transport allowance, the entire benefit of standard deduction of ₹40,000 would be available to such taxpayers. This works out to tax saving of ₹2,000 (for those in the 5 per cent slab) to ₹12,000 (for those in the 30 per cent slab) excluding cess. But here too, the benefit is reduced by the increase in cess on total tax. Thankfully, for the elderly aged 60 and more, the Budget has provided other tangible sops too — in the form of higher tax breaks on interest incomes and health insurance among other benefits (see accompanying story).

Hopes belied

For those below 60 though, big hopes have been left unmet, yet again. There was expectation of increase in the tax exemption limit (currently ₹2.5 lakh for those under 60, ₹3 lakh for those aged 60 up to 80, and ₹5 lakh for those aged 80 and more). Individual taxpayers also expected increase in the Section 80C investment limit (currently ₹1.5 lakh), higher tax breaks on medical reimbursement and children’s education allowance, and increase in tax deduction on interest payment on home loans (₹2 lakh). The last major tax breaks were given nearly four years back in the July 2014 Budget and inflation has eroded the benefits. Besides, with many state elections scheduled this year and the 2019 general election just about a year away, taxpayers were betting on the Government loosening its purse strings. But that was not to be.

(The article first appeared in The Hindu BusinessLine.)

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