Opinion: Income Tax Exemption Must Be Hiked to 5 Lakh

(Shalini Jain is director of tax and regulatory services at EY.)

Come Budget time - the individual tax payer expects increased exemption limit and permissible deductions. While the slab rates applicable to individuals have undergone minor changes during the past few years, there is always optimism in this regard. The earlier Budget 2014 presented by the Finance Minister in July 2014 increased the basic exemption limit by Rs 50,000 to Rs 250,000. The individual tax payer expects a further increase in the exemption limit to at least Rs 500,000 taking into account present cost of living and inflation.

The Income Tax Act provides for deduction in relation to certain investments and payments from the gross taxable income. While Section 80C provides for a long list of items for which deduction can be claimed, the maximum limit for the deduction was only Rs 100,000 before it was increased to Rs 150,000 in the Budget 2014.

To promote increased savings amongst individual tax payers and considering the actual expenditure incurred on items like tuition fees, a further increase in the amount of deduction to reflect real amount of investments/ expenditure would be a welcome step.

While salaried individuals are allowed deduction in relation to various allowances such as conveyance allowance and children education allowance, the amount of deductions allowed are very low. For example, Rs 800 per month for conveyance allowance and Rs 100 per month per child as education allowance up to two children. These latest amendments to the limits for conveyance and children education allowance were made in 1998, with effect from August 1997. Increase in the limits to reflect actual expenditure that may be incurred for these purposes is long awaited. Without any increase in the limits, these deductions currently have very little practical value.

Reimbursement by employer of medical expenditure incurred by employee on self or family member is exempt from tax up to Rs 15,000. Considering that the limit of Rs 15,000 was introduced in 1998 and the medical costs have increased over the years, this reimbursement limit may be increased in the present Budget. Similarly, income-tax regulations provide for deduction up to Rs 15,000 in relation to health insurance premium paid by an individual to covering self and family. This limit of Rs 15,000 includes expenditure incurred on preventive health check-up up to Rs 5,000. Budget 2015 may provide an increase in limit of deduction for medical insurance premium. This would also encourage individuals to invest in health insurance cover for self and family.

In Budget 2014, permissible deduction in relation to interest on home loan taken for acquisition or construction of self-occupied residential house was increased from Rs 1,50,000 to Rs 2,00,000. While the deduction for interest in case of self-occupied house is allowed only up to Rs 2,00,000, there is no such limit on the amount of interest allowed as deduction for let-out property. While the individual tax payer would be happy to be allowed deduction for all of the interest incurred during the year on home loan, a realistic expectation would be a further increase in the limit for deduction, say Rs 5,00,000, taking into account real estate prices and home loan interest rates.

Also, given the government's focus on dealing with black money, it is expected that the Budget would introduce steps to strengthen the tax administration system and penalise individuals who evade tax rather than increase tax burden on the honest tax payer. Provisions to ensure increased wealth-tax compliance and increase in limit of wealth tax exemption may also be introduced.

While these are some of the changes that the individual tax payer is waiting for in the Budget 2015, it remains to be seen what the Finance Minister has in store since every tax sop provided by Finance Minister would translate into a loss to the exchequer.

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