Simplify Personal Income Tax - Suggestions for Budget 2021-22- Part II Rationalised and fewer exemptions
Rohit Kumar Parmar Free lance [1]
IES (Retd)
Former Senior Economic Adviser
Ministry of Consumer Affairs, Food and Public Distribution
Rationalised and fewer exemptions
Majority of exemptions under the Income Tax Act, that are dealt with in this discussion, relate to investments under section 80, it’s variants/extensions. An investment under section 80,et.al., could offer reduction of tax at one, two or all the three stages, so the three Exemptions Es, commonly referred to as Exempt Exempt Exempt (EEE). They also have some unclassified sub-categories, because of the nature of exemptions offered. An attempt is made to draw up a list of individual exemptions, which is at Annexure.
1. The first exemption relates to investment in specified securities/deposits, that allow a reduction in the taxable income subject to a ceiling of Rs. 1,50,000. There are 26 items and several sub-items. The exemptions result in some inequity, since assessees in the higher tax brackets get a higher tax relief (in absolute and in percentage terms). However, any change will further complicate the exemptions and is not suggested.
An additional Rs. 50,000 is offered for the New Pension Scheme (NPS) and related investments, which can be combined with the first Rs. 1,50,000 subject to the overall ceiling of Rs. 2,00,000. This specific additional entitlement/relief results in benefits to the Pension providers, who are largely in the insurance sector and possibly to compensate for the poor returns offered under NPS. Merger all the exemptions without any sub-categories with the existing ceiling (Rs. 2,00,000) and index them for future. Investments withing the ceilings should be left to the choice of the assessee.
While all investments offer the first Exemption, there are differences in the subsequent Exemptions.
2. The second exemption offers relief on interest/earnings from the investment. In this category are interest on NSCs (treated as re-investment subject to the overall limit of Rs. 1,50,000), select provident funds (PF), public provident fund (PPF), etc. However, interest earned on select provident funds (PF), public provident fund (PPF) etc., are exempt without a ceiling, which causes inequity. This inequity should be removed by removing the ceiling on interest/earnings all investments, as in the case of PF and PPF.
The rationale for this is the low income tax collected from `Income From Other Sources,’ which inter-alia also includes interest income. As per the Income Tax Return Statistics Assessment Year 2018-19 Version 1.1 October 2019 (https://www.incometaxindia.gov.in/Documents/Direct%20Tax%20Data/IT-Return-Statistics-Assessment-Year-2018-19.pdf), of the 58,713,458 returns (filed for the assessment year 2018-19), with `Income From Other Sources,’ (which may include non interest incomes also), a total of 57,539,162 or 97.99 per cent have incomes of less than Rs. 5,00,000, which is tax exempt, albeit some riders.
Of the remaining, a TDS is already made of 10 percent of the amount. It is suggested that interest income for categories with a taxable income of more than Rs. 5,00,000 should be at a flat rate of 10 per cent to be done by the paying institution with no liability of filing returns. An individual who seeks refund may include the same in his tax returns.
The exemption on interest earned on select provident funds, public provident fund (PPF) has another element of inequity because the amount that is parked in the PF/PPF, in some cases is beyond the ceiling of Rs. 1,50,000. To illustrate, an assessee can invest Rs. 1,50,000 in the PPF and higher amounts in PF, in addition to investments in PF/ NSCs, etc. While the relief in the initial year for the first exemption is subject to the ceiling of Rs. 1,50,000, the interest on the amount in excess of Rs. 1,50,000 also qualifies for relief in the case of PF/PPF, which in some cases be more than the ceiling amount. This inequity needs to be corrected either by exempting interest from other investments like interest on PF/ PPF. It is suggested that re-introducing tax free bonds for infrastructure and/or other areas be considered.
Another source of inequity arises due to difference in the interpretation and/or implementation of the TDS rules. Interest on cumulative bank deposits vis-à-vis cumulative interest earnings on RBI relief bonds/ similar investments. Interest income on both is taxable. However, because of TDS on cumulative bank deposits in the year of accrual, the assessee has to include the same in the assessment year and pay income tax. The process to defer the same to a later year and so pay income tax in that year, is complicated. In the case of RBI relief bonds (in cumulative form), TDS is deducted in the year of payment. Assuming the assessee continues to be in the same income tax bracket in all the years, he loses interest on the tax paid, which is preponed to an earlier year/s, in the case of bank deposits. To bring equity for banks and to help them acquire funds, TDS on cumulative deposits of the duration of the RBI relief bonds, should be in the terminal year/ year of withdrawal.
3. The most liberal of the EEE is the Public Provident Fund, which offers all the three- Exemption on the amount invested, subject to the overall ceiling, Exemption on the interest earned and finally Exemption on the withdrawn amount on maturity. Till the floating interest rate was introduced, the interest earned was stable for a year.
At the other end of the spectrum is the New Pension Scheme (NPC) that adopts the ETT model, making the same lower in the preference table. NPS allows Exemption at the time of investment; on the returns, if not withdrawn, but taxes the same on withdrawal at the applicable rate; limited exemption only to the extent of investment in select annuity plans. Investment in select annuity blocks funds, which can be transferred to an heir only as annuity, but at a reduced value.
Several steps have been taken to improve the returns and so preference of the NPS (these need to be listed and examined separately). The NPS needs to be moved to the EEE model to bring the same at par. This will also force the NPS providers a challenge to improve the returns in NPV and other indicators.
The simplification suggested keeps in mind the need to address the inequity in the EEE categorisation. The transition should take place when all the present investments have matured to avoid shifting goal posts, when the game is at play.
To sum the suggestions are listed below.
1. Merge all the exemptions without any sub-categories with the existing ceilings (ie Rs. 2,00,000 ) and index them for future.
2. There should be no ceiling on interest/earnings on other investments, as in the case of PF and PPF.
3. Interest income for categories with a taxable income of more than Rs. 5,00,000 should be at a flat rate of 10 per cent, with no liability of filing returns. An individual who seeks refund may include the same in his tax returns.
4. Consider exempting interest from other investments like interest on PF/ PPF. Also consider re-introducing tax free bonds for infrastructure and/or other areas.
5. TDS on cumulative deposits of the duration of the RBI relief bonds, should be in the terminal year/ year of withdrawal.
[1] Author has in posts on his website (https://rohitkparmar.wixsite.com/site), twitter (https://twitter.com/rohitkparmar?s=09), facebook (https://www.facebook.com/me/), linkedin (https://www.linkedin.com/in/rohit-kumar-parmar-841b4724) been writing on impact of Covid and can be reached at rohitkparmar@yahoo.com.
Starting 1992, the author has been writing on Direct Tax Reforms in `The Economic Times’. Some of these are available on his website.
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