Union Budget 2021: Govt should provide relief, cuts in personal tax; levy cess, increase rates for high income taxpayers

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The Finance Bill (popularly called Budget) for the financial year starting 1 April 2021 would be presented on 1 February 2021. As individual taxpayers, most of us eagerly wait for the Budget as it lists down proposals which would impact the taxability of income for the next financial year. Changes proposed by the Budget, once approved, have the potential to increase or decrease one’s post-tax income.

There are lot of expectations from Budget 2021 as it would be presented amid the COVID-19 pandemic which has caused significant disruption in the lives of many as well as severely impacted the economy. On the personal tax front,
some of the expectations from the Budget are:

Simplification of tax laws and ease of compliance: The government has continuously moved towards theprocess of simplification of tax rules and ease of compliance in the last few years. Various steps have been taken in the recent past to simplify compliances and provide better taxpayer experience such as faceless assessments/appeals/penalty, issuance of refund electronically, Taxpayers’ Charter etc. This Budget is expected to take the journey forward by bringing further simplification in some of the compliance requirements/processes.

Deduction for medical expenditure for all: As per the current tax laws, deduction for medical expenses (upto Rs 50,000) is available only for expenses incurred on or by senior citizens who don’t have health insurance. Considering the soaring medical expenses, especially on account of COVID-19 , the Budget should introduce such deduction for all who do not have health insurance.

Incentivising purchase of affordable housing/electric vehicles (EV): Currently, for first-time home buyers, an additional deduction of up to Rs 1,50,000 is allowed in respect of interest paid on loan to purchase a residential house property, if certain conditions are met. This is in addition to the deduction of Rs 2,00,000 which is available for interest paid on housing loan. Also, buyers of EV can benefit from a deduction of upto Rs 1,50,000 for interest paid on loans to buy EV, subject to certain conditions. Amendments should be brought
to incentive purchase of such assets even where a loan is not availed.

Legislative amendments for Leave Travel Concession Cash Voucher (LTC) Scheme: Due to COVID-19 pandemic, salaried employees were unable to travel and claim tax exemption on leave travel allowance. To address this and incentivise consumption, the government introduced an innovative LTC scheme for salaried employees. The scheme provides tax exemption for expenses incurred on purchase of eligible goods and services (subject to specified conditions). The legislative amendments are yet to be issued in this regard and are expected to be addressed in the Budget. Also, the LTC Scheme could be extended beyond 31 March 2021 to boost consumption.

Introduction of the deduction for investment in Infrastructure bonds: Infrastructure bonds generally provide long-term liquidity to the issuer. Considering the huge spending needs for economic recovery, these bonds could help the government with immediate liquidity. For individuals investing in such bonds, tax deduction could be provided (upto specified limit) which would make investments in these bonds more attractive.

While providing reliefs and deductions for taxpayers is one aspect of the Budget, the government also has to fulfil its revenue needs to cope with the COVID-19 pandemic and accelerate growth. Some of the ways in which this
could be achieved are:

Enhancing LTCG tax rate on the sale of property: The tax rate applicable at present on Long-Term Capital Gains (LTCG) arising from the sale of a property is 20 percent. Such LTCG may be subject to tax at higher rates or at normal slab rates for individuals who own more than two house properties.

Imposition of COVID Cess for high-income earners: The government may levy a special one-time cess on taxpayers falling in the 30 percent slab rate to garner resources for meeting the increased government spending on account of COVID.

There must be extraordinary measures for extraordinary times such as the COVID-19 pandemic. Hopefully, Budget 2021 will bring changes keeping in mind the needs and aspirations of the nation as well as its citizens.

The writer is Tax Partner – People Advisory Services, EY India. Ankur Agrawal, senior tax professional, EY India also contributed to this article.