Union Finance Minister Nirmala Sitharaman is set to present the Budget 2021-22 on February 1. While the pandemic upturned lives in the year 2020, 2021 will be a year of recovery and growth, and therefore expectations are running all-time high that the government will announce some measures that will bring some relief to the salaried class. From bringing back jobs in the market to tax deductions, there are a lot of expectations from Modi government's Budget.
Although Sitharaman, in the last Budget, announced cuts in personal income tax, the government has so far pushed for a rebate on all payable taxes, and the basic tax exemption limit has remained the same. She had also offered an optional lower rate of income tax to individuals as she introduced new tax slabs of 15 per cent and 25 per cent in addition to the existing 10 per cent, 20 per cent and 30 per cent. The new I-T slabs, which came into effect on April 1, 2020, are for individuals not availing of certain specified deductions or exemptions.
Exemptions Under 80C
Currently, an individual taxpayer is eligible to claim deductions of up to Rs 1.5 lakh in the old tax regime on various payments including life insurance premiums, fixed deposits, provident funds, etc under Section 80C. According to Vishal Bhatia, CFO, True Balance, this is the right time to revise and increase tax exemptions as this can generate demand across industries as individuals will be having more money in their hands to spend.
Exemptions Under 80D
There is also a demand to increase the limit of medical insurance premium under section 80D. The limit is currently fixed at Rs 25,000. The pandemic has shown that health policy is a necessity and therefore the government should increase the upper cap exemption on health insurance under Section 80D. As per the current provision, an individual can claim an exemption of up to Rs 25,000 towards health insurance for self, spouse and kids.
This deduction is available over and above the deduction of Rs 1,50,000 under Section 80C.
The government, he said, may increase this upper limit which will encourage people to spend more on tax-saving instruments. "Steps towards increasing 80C/80D exemptions should also be taken," Bhatia said, adding that people also expect a higher standard deduction from the current Rs 50,000 to Rs 75,000 - Rs 1,00,000.
DK Mishra, a tax expert, said that the expectation is that the government should increase the 80C limit from Rs 1.5 lakh to somewhere around Rs 2.5 to 3 lakhs. Besides, there is also a demand to increase the limit of health insurance premium under section 80D.
New I-T regime
Under the new I-T slab, annual income up to Rs 2.5 lakh is exempt from tax. Those individuals earning between Rs 2.5 lakh and Rs 5 lakh are paying 5 per cent tax. Income between Rs 5 and 7.5 lakh are taxed at 10 per cent, while those between Rs 7.5 and 10 lakh at 15 per cent. Those earning between Rs 10 and 12.5 lakh pay tax at the rate of 20 per cent, while those between Rs 12.5 and Rs 15 lakh pay at the rate of 25 per cent. Income above Rs 15 lakh is taxed at 30 per cent.
Individuals opting for taxation under new rates are not entitled to exemption/deductions including under Section 80C and 80D, LTC, housing rent allowance, the deduction for entertainment allowance, professional tax, and interest on self-occupied/vacant property.
Before the new tax regime which is optional, annual income up to Rs 2.5 lakh is exempt from I-T. While a 5 per cent tax is charged for income between Rs 2.5 and 5 lakh. 20 per cent for income between Rs 5 lakh and Rs 10 lakh and 30 per cent for those earning above Rs 10 lakh.