Some Income Tax Rules Need To Be Updated

The Budget session (2018-19) of Parliament will begin on January 29, 2018 and the Union Budget will be presented by the finance minister on February 1, 2018. There are expectations that the government will provide tax benefits to individual taxpayers to spread positive vibes considering that the general election will be held next year and it will be the last full budget of NDA government in the present term.

Some provisions of the Income-tax Act are outdated and are still in same shape in which they were introduced originally. Here is a list of 10 recommendations for the CBDT (Central Board of Direct Taxes) in respect of personal taxation matters:

1. Salaried persons are allowed to claim tax exemptions for the Leave Travel Allowance (LTA) received by them from their employer if they go on vacation anywhere within India. This exemption is still allowed only for vacations within India. The travelling cost to visit some overseas destinations is lesser compared to tourist destinations in India. Therefore, it is recommended that the exemption should be allowed for both Indian destinations and foreign travel.

2. Currently, an employee can claim deduction up to Rs 15,000 for reimbursement of medical expenses obtained from the employer. This limit of Rs. 15,000 was introduced way back in the year 1999. In last 18 years, cost of medical treatment has increased manifold but the exemption limit has never been revised. It is recommended that the exemption limit on medical expenses should be raised to at least Rs. 50,000 per annum.

3. Section 80C allows deduction of up to Rs. 1,50,000 in respect of payment for life insurance policies, repayment of housing loan, PPF (Public Provident Fund), children's education expenses, so on and so forth. The threshold limit under this Section is only Rs 1,50,000 which generally gets exhausted and very little money is left for investment in other schemes. Therefore, it is recommended that the maximum deduction under Section 80C should be increased to Rs 2,50,000.

4. The amount invested in a fixed deposit (FD) with a maturity of five years or more qualifies for deduction under Section 80C. Interest received on such FDs is charged to tax in the hands of the investor. Since many banks have substantially reduced the rates of interest on FDs, the net return on investment after taxes is inadequate. Therefore, interest accruing on FDs up to reasonable threshold limit should be exempted from income tax.

5. For the last four years, the basic exemption limit has remained the same at Rs. 2.50 lakh. This year, the government should increase the threshold limit.

6. Employees switching jobs are often required to pay a sum to the employer for not serving the entire notice period. It is a double whammy for the employees, as they are required to pay the money to the employer and are not allowed to claim the deduction for such payment. In a recent case - NandinhoRebello v. DCIT [2017] 80 taxmann.com 297 (Ahmedabad - Trib.), the Tribunal held that tax will be levied only on actual salary received by an employee. Therefore, it is recommended that Section 16 must be amended suitably to allow deduction of notice pay.

7. Section 54 and 54F of the Income Tax Act provides very little time to the taxpayers to invest in a new house. It allows up to two years to purchase a property and three years to construct it. Generally, for a big project or township, the developers take a minimum of five years before handing over the possession of the property to the buyer. In that case, if a buyer gets the possession of a new house after three years, he or she is not allowed to claim the Section 54/54F exemption. Therefore, suitable amendment is needed to allow exemptions under Section 54/54F to genuine taxpayers who invest in a project developed by a builder registered under RERA.

8. Till financial year 2004-05, an additional deduction, i.e. standard deduction, was available explicitly against salary income. It was withdrawn from assessment year 2006-07. There are various expenses that an employee incurs during the course of his or her employment for which no deduction is available. As per return filing statistics, the maximum number of returns has been filed in Form ITR 1, which is generally used by salaried persons and pensioners to file their annual return of income. Salaried employees are always considered as one of the main contributors towards direct taxes. The government should allow some additional benefits to the salaried employees by reintroducing the standard deductions type of provisions.

9. There are several allowances which are provided to an employee by his or her employer which are exempt from tax up to certain threshold limits. These threshold limits are too insufficient as they were never revised. Inter-alia, Children Education Allowance is exempt up to Rs. 100 per month, hostel expenditure is exempt up to Rs 300 per month etc. The government should immediately increase the threshold limits of these allowances and link them with inflation index.

10. An employee is allowed exemptions from House Rent Allowance if he or she is paying rent for residential house. Higher deductions are allowed to employees who are in four metropolitan cities - Mumbai, Delhi, Kolkata and Chennai. The rental charges for a house in cities like Bengaluru or Hyderabad are not less in contrast to aforesaid 4 metropolitan cities. Therefore, the government should also include many other cities in the category of higher exemptions for HRA in cities like, Bengaluru, Hyderabad, Pune, Ahmedabad, Jaipur, Noida, Gurgaon etc.

(Naveen Wadhwa is Deputy General Manager at Taxmann)

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