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TAX BREAKS

Budget 2016: What is my take-home salary?

India-budget-salart-tax
Reuters/Amit Dave
Counting cash.
By S Natarajan

Associate director, personal tax, PwC India

Published Last updated This article is more than 2 years old.

For India’s salaried class, there is one key expectation from finance minister Arun Jaitley’s third budget on Feb. 29: tax relief.

Although businessmen and professionals are entitled to various deductions while computing their taxable incomes, the salaried class hardly has any such avenues, other than investment-linked reliefs.

For an individual with the highest tax slab, over 40% of the income is diverted towards income tax and provident fund contributions. As a result, most are left with less than 60% as net take-home.

Although the Narendra Modi government has exceeded its target in indirect tax revenues significantly in the current fiscal, there is a shortfall in direct tax collections, leaving the government with limited elbow room to provide tax breaks.

There is a possibility that the finance minister could widen the tax bracket to tax an individual at 30% if the taxable income exceeds Rs20 lakh, instead of the current limit of Rs10 lakh. Alongside, there could also be a downward revision of tax rates in a phased manner, similar to the proposal to reduce tax rates for corporates.

Here are some other key changes that the aam aadmi would look for in Budget 2016:

  • Enhancement of basic exemption

Currently, an individual has a basic exemption of Rs2.5 lakh. If this could be increased to Rs3.5 lakh, it would effectively generate annual tax savings of around Rs10,000 (assuming the assessee has a taxable income of over Rs3.5 lakh).

  • Medical reimbursements

A salaried employee is entitled to a tax break for medical reimbursements from the employer to the extent of Rs15,000 per annum. This limit has remained unchanged since 1999.  

Considering the cost inflation index (CII) notified under the tax laws, this limit must be increased to at least Rs40,000 per year. This would be in line with the inflation (actual) cost of medical care in India currently.

  • Children’s education/hostel allowance

Currently, children’s education allowance of Rs100 per month and hostel allowance of Rs300 per month are exempt from taxes. These limits have been unchanged for a long time now and are nowhere close to the actual costs incurred. One would expect these limits to be increased to at least Rs1,000 and Rs3,500 per month, respectively, in order to be meaningful.

  • Deduction towards investments (Section 80C)

The deduction available towards specified investments—contribution to provident fund, payment of insurance premiums, tuition fees, etc.—is currently Rs1.5 lakh, with a further deduction of Rs50,000 available for contribution towards the National Pension Scheme (NPS).

Since the investments covered under section 80C are numerous, the limit of Rs1.5 lakh often does not suffice. Accordingly, the 80C limit could be increased to Rs2.5 lakh without any insistence on specific investment such as the NPS.

  • Home-owners

The deduction allowed towards interest repayment on housing loan is only up to Rs2 lakh for a self-occupied house. The initial limit of Rs1.5 lakh was set in 2004 fiscal year and was increased by a meager Rs50,000 in last year’s budget. Considering the increase in real estate costs, and if one were to use the CII, the interest deduction limit must be increased to at least Rs3.5 lakh.

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