Articles

As the Finance Minister and his team start work on the Budget, here are some suggestions from experts that are worth including in the draft.

A majority of taxpayers want Finance Minister Arun Jaitley to raise the basic exemption limit as also the tax deduction under Section 80C. Only 5% of the 829 respondents to an online survey conducted last week said the basic exemption and tax deduction limit should be kept unchanged in the Budget (see page 8). While 52% of the respondents wanted the basic exemption limit to be raised to `3 lakh, 43% wanted the limit to be linked to inflation and automatically raised every year. That’s a good idea and could reduce the speculation generated in the weeks before the Finance Bill is tabled in Parliament.

Our cover story this week is a collection of Budget ideas for Jaitley and his team. We reached out to experts from various areas of the financial services industry and compiled their suggestions for the Budget. Most of the experts want the investment limit raised.“The Indian investor’s equity allocation is very low and the Budget should address this serious issue. We are hoping for a separate `50,000 limit for ELSS funds,“ says A. Balasubrahmanian, CEO, Birla Sunlife Mutual Fund. Others have sought new tax deductions and more options for retail investors.There are also suggestions for amending the tax rules for key goals such as retirement planning and education savings for children.

Budget needs to simplify tax laws

None of the experts has, however, asked for a simplification of the tax laws. ET Wealth believes that tax laws need to be simplified for better compliance. The Direct Taxes Code (DTC) of 2009 was a great piece of legislation and would have greatly simplified the financial lives of Indians. It had proposed to do away with the web of tax exemptions and deductions. Income from all sources, including capital gains from stocks, maturity proceeds of insurance policies and even the PPF, was proposed to be taxed. There was also no distinction between shortand long-term capital gains. On the flipside, the basic exemption and the tax saving limit were raised. The tax slabs were also generously expanded. The 10% tax slab was extended to income of up to `10 lakh a year, while the 20% tax slab was from `10 lakh to `25 lakh.

Most Indian taxpayers would have found the DTC proposal too revolutionary. It was also not acceptable to the political class, including the members of the ruling party.Even the bureaucracy baulked at the proposal. (One clause said official residences would be valued as a perk at market rates and the occupier would be taxed accordingly).

Taxpayers stand to benefit

Even so, the DTC would have been good for the common taxpayer. Our calculations show that the DTC would have lowered your tax outgo. We looked at the finances of a typical middle-class salaried person with a gross annual income of `18 lakh, including capital gains and interest income from investments.If he avails of the various deductions that are ordinarily offered to employees, his tax would be roughly `1.44 lakh. However, under the DTC his tax would be lower at `1.33 lakh. This assumes a higher basic exemption limit of `3 lakh and a `5 lakh deduction for tax savings (see table).

It is unlikely that the DTC will be resurrected. But we hope that Jaitley will borrow some of the good points from that legislation and incorporate them in the Budget. This includes the removal of tax deductions that are out of sync with reality. We also hope Jaitley finds the suggestions from experts worth including in the Finance Bill 2016.(With inputs from Narendra Nathan, Sanket Dhanorkar, Chandralekha Mukerji, Preeti Kulkarni and Neha Pandey Deoras)

RETIREMENT SAVINGS

DHIRENDRA KUMAR CEO, Value Research

Make NPS income tax free

RETIREMENT PLANNING is perhaps the longest term goal for any individual. If the government wants to encourage long-term equity investments, it must remove the anomalies and inconsistencies in the taxation of the National Pension System (NPS). Right now, the scheme is treated as Exempt Exempt Tax (EET). This is at a sharp disadvantage to the other major retirement products such as the Employees Provident Fund (EPF) and the Public Provident Fund (PPF). It is high time that the NPS too is given the EEE status in order to encour age retirement savings.

The basic problem with EET is that when an investor withdraws the corpus after retirement, he will be taxed on it. At least 40% of the corpus will have to be put into an annuity for a monthly pension.This pension will also be taxed as income.

The Kelkar report on tax reforms had recommended that all investments (NPS, EPF and PPF) should be EET. This was actually there in the first draft of the Direct Tax Code but obviously, it’s politically impossible to start taxing EPF and PPF withdrawals.

The other argument for taxing NPS was that it was a replacement for the existing system of pension for government employees, in which pension is just post-retirement income and is taxed like any other income. But this argument is untenable. The legacy pension system may be like a post-retirement salary but the NPS is a defined contribution product where the investor gets returns earned by his investments. This is similar to the EPF and the PPF. The Budget should, therefore, just make NPS completely exempt, which will level the playing field for all retirement products.

TAX SAVINGS

RAJIV BAJAJ

Vice-Chairman & MD, Bajaj Capital

Initiate `Jan Vittiya Yojana’

SECTION 80C should be considered a natural extension of the Jan Dhan Yojana and termed `Jan Vittiya Yojana’. As a first step, the ceiling of `1.5 lakh should be raised to `2.5 lakh and all eligible investments under this Section should be segregated into three groups: Protection (life insurance plans); Regular income assets (PF, pension plans, small savings schemes); Growth assets (mutual fund ELSS, Ulips, NPS). Besides, deductions under Section 80C on expense items like tuition fee should be excluded.

The infrastructure bonds should be restarted and tax-free bonds should continue. Besides, the government should form a self-regulatory organisation of distributors and set a target of creating 1 million financial distributors in the next one year under the `Skill India’ campaign. There should also be a single digital KYC for all financial instruments.

MUTUAL FUNDS

ADITYA AGRAWAL CEO, Morningstar India

Treat fund of funds as equity

funds for tax. Asset allocation is key in portfolio creation. Investors often falter on this front either due to lack of credible advice, lack of time, or focus on standalone products. Multi asset fund of funds (FoF) can help investors here. These could be multi-manager FoFs or single-manager FoFs. However, in India, such schemes get unfavourable tax treatment vis-a-vis open-ended equity funds. Global funds too can be useful risk diversifiers for domestic-only portfolios. But these are also taxed under the FoF structure. Bestowing favourable taxation to these two fund types can help investors reach their goals.

MUTUAL FUNDS

MANOJ NAGPAL CEO, Outlook Asia Capital

Scrap ELSS, give benefit to all funds

ELSS funds are eligible for deduction under Sec 80C. In NPS and Ulips, Sec 80C benefit is available irrespective of an investor choosing equity or debt. To bring parity, the Budget should scrap ELSS and allow Sec 80C deduction in all existing open-ended mutual fund schemes with a lock-in of 3 years for the specific investment. To encourage savings, the Budget should introduce a deduction for SIP investors in mutual funds. There should be clampdown on the practise of dividend stripping.

MUTUAL FUNDS

PRABLEEN BAJPAI Director, FinFix Research & Analytics

Revamp RGESS to attract investors

THE RGESS was designed to attract small investors to equities, but its restrictive nature has prevented it from making a meaningful impact. The scheme offers deduction under Section 80CCG to `firsttime’ retail investors with an annual income of not more than `12 lakh. Also, the deduction is only 50% of the invested amount, up to a maximum of `50,000.The Budget should remove these restrictions and make the scheme more broadbased. That might help it garner more than the `100 crore it has in three years.

MUTUAL FUNDS

1. BALASUBRAHMANIAN CEO, Birla Sun Life Mutual Fund To increase investors’ equity allocation, the Budget should have a separate `50,000 exemption for ELSS.This should be besides the `1.5 lakh limit under Section 80C, which is currently exhausted by other instruments like the PF, PPF and insurance. The government tried to direct new investors to the capital market through the RGESS, but the conditions were very rigid. These conditions need to be relaxed and be valid for all ELSS schemes. To reduce the impact of tax on capital gains, investors should have the option of investing in equity mutual funds besides the current options of purchasing a new house or specified bonds.

PENSION

SUMIT SHUKLA CEO, HDFC Pension Fund

Resolve NPS tax issues

THE issue of EEE (tax exemption at the time of investment, accrual and withdrawal) with respect to the National Pension System needs to be addressed. Taxing the lump sum and annuity are the biggest hurdles.The finance minister should also do away with the service tax charged on annuity purchased from the NPS corpus. The government should look at bringing pension products under the ambit of the Pension Fund Regulatory and Development Authority and introduce uniform rules, particularly on taxation.

The government should consider hiking the additional tax deduction limit for NPS from `50,000 to `1 lakh. The tax treatment for NPS Tier-2 account needs clarity and should be addressed in the Budget.

INSURANCE

TAPAN SINGHEL

MD & CEO, Bajaj Allianz General Insurance

Tax sops for home cover

RECENT NATURAL calamities in India revealed a disturbing trend--huge losses to property and assets, of which less than 1% were insured. The need of the hour is solutions that will encourage more people to avail of insurance, like tax benefits. It is ironical individuals who insure their factories, automobiles or business units do not feel the need to insure their homes against calamities and have to break their investments, sell their assets or borrow to recover from such losses.

One option could be incentivizing the premium paid for insuring your home and assets to attract more Indians to avail this protection. The government initially incentivized buyers to get them to buy life insurance, followed by health by providing tax benefits for availing these instruments. The government could now allow tax benefits for home insurance covers as well. We believe this might act as an impetus to opt for home insurance. So the next time an unforeseen event occurs, nobody has to sell their personal assets or break their savings meant for other life goals to make ends meet.

INSURANCE

PUSHAN MAHAPATRA MD and CEO, SBI General

Link tax rebate to income

TAX rebates on critical illness-cumaccidental death policies should be dynamically linked to the taxable income of the individual. Premiums paid should be made tax-free for coverage up to five-times the annual taxable income. This will motivate people to buy adequate insurance cover for themselves and upgrade their cover as income rises.

We also hope that the government will announce incentives to boost online and mobile insurance transactions. This can be done by offering tax rebates across all types of retail policies bought or renewed online. This will push companies and individuals to take the online route which will lead to greater penetration of general insurance products.

HOUSE RENT

BHUVANA SHREERAM Head, Financial Freedom Golden Practices

Raise house rent deduction limit

INCOME tax rules for house rent exemption are discriminatory. A salaried person who gets house rent allowance (HRA) as part of his compensation can claim a big deduction. Someone drawing `15 lakh annually with a `4 lakh HRA component and paying a rent of `33,000 a month, can claim `2.96 lakh as a deduction from taxable income. On the other hand, self-employed persons and those who get a lump sum pay with no HRA component can only claim a maximum deduction of `2,000 a month under Section 80GG. This is unfair and the Budget should address this anomaly by raising the limit to at least `10,000 a month.

REAL ESTATE

SUKANYA KUMAR Director, Retaillending.com

Incentives for reverse mortgage

REVERSE MORTGAGE is a useful tool for unlocking the value of real estate assets.Unfortunately, too many conditions have narrowed down the scope of reverse mortgage. The Budget should relax the minimum age of borrower from the current 60 years as also remove the clause on self-occupied property. A couple may choose to move to their native place after retirement and reverse mortgage their house in the city. The loan-to-value ratio of reverse mortgage should also be freed from capping. Calculating it on the basis of the current market value of the property is unreasonable because the value will obviously rise over the years.

INSURANCE

RAJESH SUD

MD and CEO, Max Life

Exclusive tax breaks for life insurance

A SEPARATE limit of up to `1.5 lakh should be considered exclusively for investment in long-term financial instruments such as life insurance. This will also help channel small savings to infrastructure funding which is of critical importance.

Given the increasing life span of Indians, and the limited state supported social welfare schemes for the elderly, tax incentives should be provided to encourage retire ment planning. We propose that the specific tax breaks of up to `1 lakh be extended to include all retirement plans. Additionally, annuity should be exempted from income tax.

As life expectancy increases, life insurance will form an important part of the financial portfolios of people, particularly the middle-aged and those approaching retirement. The current norms state that tax exemptions will be allowed on policies where the cover is at least ten times the annual premium.As the cost of mortality charges for the aforementioned group of consumers is high, it makes life insurance an unviable long-term savings product for them. We propose that this tax exemption be based on the term of the policy.

TAX BENEFITS

GAURAV MASHRUWALA Certified Financial Planner

More for housing, health

The government needs to further increase the tax deduction limit for housing loan and healthcare insurance premium. For a `20 lakh house, a `2 lakh limit may seem okay. But for home-buyers in big cities, this limit is peanuts. Similarly, given the treatment cost of critical diseases such as cancer or heart ailments, people need a higher health cover and tax breaks.Section 80C is packed with numerous deductions including deduction for paying your child’s tuition fees.The government should remove this break from Sec 80C and place it in an independent section.

REAL ESTATE

ARCHIT GUPTA Founder & CEO, Cleartax.in Founder & CEO, Cleartax.in

No penalising home buyers

DELAYS IN construction by the builder leads to a higher interest outgo as well as loss of tax benefits for home buyers. A tax deduction of `2 lakh is allowed on loans taken for purchase or construction of a house. If an under-construction property is purchased, tax benefit of `2 lakh is claimable only if construction is completed within 3 years. Now, buyers who invest in under-construction projects suffer when there are delays and the project does not get completed within the timeframe. Their tax benefit is reduced to `30,000, in a such case. Given the intent behind this tax benefit is to support housing and consequent growth, deduction of Rs`2 lakh should be allowed if the delay is from the builder’s end.

Those who are first time owners and have purchased the property for self-occupancy, end up paying rent as well as interest while losing out on tax benefits, which is unfair.

The deduction must be extended and available to these buyers too.

A similar situation exists while availing exemptions under Section 54 and 54F against long-term capital gains. If an under-construction property is purchased from the gains, its construction must be completed with in 3 years of the sale of the asset to avail exemption.

The Finance Minister may consider these changes in the laws to reduce litigation and benefit first-time home owners. These changes will lead to a positive tax impact for tax-payers, without burden ing our fiscal deficit which is making it harder for governments to extend more tax exemptions.

TAX SAVINGS

AMIT KUKREJA CFP & Founder, WealthBeing Advisors

The basic tax exemption limit should eb raised to `3 lakh and tax slabs should be linked to inflation. The Section 80C limit of `1.5 lakh should be dedicated to retirement planning and include investments like the EPF, PPF, tax-saving FDs, ELSS, Ulips and endowment plans. A separate section should offer a `50,000 break for term plans, personal accidentdisability covers and pension plans to encourage people to buy pure protection plans. Infrastructure bonds should be brought back under a separate section with a higher deduction of `50,000 to promote long-term investment.

TAXATION

TAPATI GHOSE

Partner, Deloitte Haskins & Sells LLP

Treaty reliefs for outbounds

THE NUMBER of employees deputed overseas by Indian industry is on the rise. From an individual tax perspective, this population has to face significant challenges in the form of mitigating double taxation, and this is where changes in domestic tax laws are required. Unlike countries such as the US, India does not have clear provisions under its domestic tax laws to provide for exemptions and credit for foreign taxes. There are no clear guidance on the related tax positions and documentation to be submitted to claim relief under the treaty, resulting in significant lit igation. Non-residents often need to get a ruling from the authorities to obtain certainty in taxes, which can be a long-drawn out process.

India needs to incorporate regulations relating to mitigation of double taxation in its domestic tax laws.The domestic tax laws need to have clear provisions to provide for exemptions, especially where the income is not India sourced. The regulations should also specifically provide for availability of credit for foreign taxes.

Further, the reliefs available under the treaty should not be restricted under the domestic tax law by procedural requirements such as submission of Tax Residency Certificate (TRC). Obtaining a TRC can be challenging from a cost perspective and in terms of practicality. The fact that tax years in India and the overseas jurisdiction are not aligned only adds to the woes of the taxpayer. Requirement to furnish TRC should not be mandatory for individual taxpayers.

STARTUPS

ASHNEER GROVER CFO, Grofers

Easy TDS exempt for startups

THE government should make it easier for startups to claim TDS exempt status under Section 197. The startups make losses initially but that does not stop sellers and banks from deducting TDS. This hits liquidity.

While earlier one could get a generic exemption under Sec 197, the mechanism changed and now one gets exemption only from specific deductors mentioned in the application list. It would benefit startups if the government goes back to the earlier mechanism.

TAXATION

HOMI MISTRY Partner, Deloitte, Haskins & Sells LLP Increase limit of deductions

FROM A personal tax perspective, the exemption limit is expected to go up from `2.5 lakh to `3 lakh. The government should also consider increasing limits for deductions, exemptions and allowances taking inflation into account.Standard deduction should be re-introduced for the salaried class. Deduction under Sec 80CCF should be re-introduced for investment in infrastructure bonds up to `50,000. The limit allowed for medical insurance premium may be increased from `25,000 to `35,000.

EDUCATION

MINAL AGARWAL Chartered accountant Exempt education savings from tax

CHILDREN’S education is an important goal for Indian parents. While tuition fees gets a deduction, long-term savings for education should also get tax benefits.Just like the 529 investment plans in the US, there should be child education funds that offer tax deduction on the contribution. To ensure that the corpus is not used for other goals, Sebi can ensure that the fund house makes the payment directly to the educational institute in which the child takes admission.Regular withdrawals should invite a penalty.

STARTUPS

ANKUR MITTAL Co-founder, Kidology

Spare the angel investors

SECTION 56 (2) of the IT Act makes startups liable to pay taxes on any investment received. And, sale of unlisted securities within 3 years of investment are taxed as short-term capital gain and the gain cannot be set off against any loss from similar investment. These clauses hit angel investors and startups trying to raise money hard. The government should encourage individual investors to support new businesses by giving them and the businesses receiving funds tax breaks. Angel investment is the initial lifeline of startups. If the tax regime supports such investments, investors will treat angel investing as an asset class.

REAL ESTATE

AMIT MAHESHWARI Managing Partner, Ashok Maheshwary & Associates

Increase tax break cap to5 years “If under-construction properties are not delivered within 3 years, home buyers cannot claim deduction for interest on housing loan beyond `30,000. Sec 54 provides exemption from capital gain after transfer of property. If the capital gain is invested in buying an under-construction property, the same 3-year cap applies. The government should look at a higher cap of say 5 years.“

TAX PLANNING

M.K. AGARWAL

CA and senior partner, Mahesh K Agarwal & Co.

Tax planning too needs reforms

THE RUSH OF MARCH is an annual phenomenon when millions of taxpayers run around to beat the 31 March deadline. In their quest to save tax, they invest in instruments without understanding the fine print or make long-term financial commitments they cannot keep. They also take big risks by investing lump sum in equity-oriented instruments. This rush can be avoided if the Budget changes the way deductions are claimed. Instead of allowing the entire `1.5 lakh deduction to be claimed anytime during the year, the Sec 80C benefit should be staggered across the four quarters of the financial year. Just like one pays advance tax in instalments, the Sec 80C benefit should be available in four tranches: `30,000 in each of the first two quarters, `40,000 in the third quarter and `50,000 in the final quarter. This will ensure that tax planning becomes a well thought out af fair instead of the yearly circus that starts in Janu ary and ends in March and leads to haphaz ard investments.