Budget 2019: How FM's income tax sops could help promote savings and investment

After the recent electoral win, the government has the challenging task ahead of reviving economic growth. To this effect, the full-year Budget for 2019 on July 5, 2019, may have announcements to boost economic growth. It is anticipated that the government could announce certain tax reliefs to augment disposable income in the hands of individuals. A few areas where the government could announce tax incentives are as follows:

'Housing for all' has been the government's focus, and considering that the housing sector has been struggling with oversupply and tight liquidity, the government could announce certain reliefs to revive the sector. Among other things to boost the demand in the housing sector, the government could consider the following:

• Currently, deduction on account of interest on home loan is restricted to Rs 2 lakh in respect of a house property which is self-occupied. Considering the fact that real estate has become expensive in metro cities, and borrowing cost is a significant proportion, Finance Minister Nirmala Sitharaman could increase the deduction for interest on self-occupied property to Rs 4 lakh.
• Loss from house property above Rs 2 lakh per annum is currently required to be carried forward for set-off against income from house property for a period of eight years. As the amount of interest cost is much higher, and absorption of the loss within the given period may not be possible, this limit may be scrapped and the loss may be allowed to be carried forward without any restrictions.
• Under current tax laws, an individual could claim deduction for interest paid on home loan for the pre-construction period only after the completion of property for a period of five years. Given that the construction period could run into many years, and the amount of interest component being high, the government could consider a separate deduction limit for pre-construction interest, in addition to the regular borrowing cost.

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Currently, contribution to various prescribed investments are eligible for deduction under section 80C, 80CCC, and 80CCD (1) of the Income-Tax Act, up to a limit of Rs 1,50,000.  As a wide variety of investments are eligible for such tax relief, and the threshold was last revised in Budget 2014, the government could consider increasing the threshold to Rs 2,00,000. This measure would provide an impetus to savings and capital formation.

Interest earned on savings bank/fixed deposits are eligible for a deduction up to Rs 50,000 per annum in the hands of senior citizens, while interest from savings bank account up to Rs 10,000 is eligible for a deduction in the case of other individuals and HUFs. The Finance Minister could consider enhancing the limit to Rs 50,000 (from savings as well as time deposits) across all categories of individuals.

The government has been focussing in promoting the National Pension Scheme (NPS). As per current provisions, an additional deduction of Rs 50,000 per annum, over and above the deduction of Rs 1,50,000 under section 80C, is permissible as per provisions of section 80CCD (1B). This limit could be increased to Rs 1,00,000 to make this scheme more popular.

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Currently, salaried individuals can claim exemption of Rs 100 per month, per child for up to two children towards children education allowance. Considering that education has become expensive and current limits were prescribed long time ago, the FM could consider revising the same to Rs 1,000 per month per child, up to two children.

The tax threshold has not been revised since 2014. Given the general increase in prices, the FM could consider increasing the tax threshold to Rs 5 lakh, especially because there is a rebate for people having taxable income up to Rs 3.5 lakh. Thus, it could reduce the administrative burden of filing a tax return for people with income in the aforesaid tax bracket.

The above measures could help in giving individuals more disposable income and will also promote investments and capital formation in the country.

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(Homi Mistry is Partner, Deloitte India. Ajay Nahata is Senior Manager and Shweta Kanjariya is Deputy Manager with Deloitte Haskins and Sells LLP)