The Rs 4.44 Lakh Deception

The fixation with quoting a scholar in the budget speech seems to be the trend. So, when Union finance minister Arun Jaitley recited Kuchh toh phool khilaye hain humne, kuchh aur khilane hain,/Dikkat yeh hai ki raahon mein kayi kaante purane hain, I was not surprised but intrigued and started thinking about what plan he was actually going to lay out for the taxpayer. I read the quote as a warning of the thorns that we will come upon in the future than the flowers he was promising. After 90 minutes of listening to his flowery speech, there was little left to cheer for individual taxpayers. Here is why:

Income tax: Yes, he did not touch the slabs. He made every taxpayer in the country feel they were going to get rich by throwing up the figure of Rs 4.44 lakh a year, being the sum that each taxpayer could claim exemptions under by saving and investing across various instruments that link savings with tax-planning. The additional Rs 64,200 that you now need to deploy has come in with an increase in limit of deduction in health insurance premium, pension funds, the New Pension Scheme (NPS) and transport allowance. Effectively, you need to set aside more money to avail of higher exemptions. If you blindly use all, you will have little money left for domestic needs.

Health: The limit of deduction on account of health insurance premium was upped from Rs 15,000 to Rs 25,000 for those less than 60 years, and in the case of senior citizens, the limit was increased from Rs 20,000 to Rs 30,000. And in case of senior citizens above 80 years, who are not eligible to avail of health insurance, the deduction allowed for medical expenses was upped to Rs 30,000. The existing differential charges in hospitals for patients with insurance and those without insurance will only get heightened. Those with insurance may just end up helping corporate hospitals profit more. Smart insurance agents will push people to take medical insurance for sums that may be too high and unnecessary—with premiums that will rob you of small pleasures such as holidays. 

Home loan: The interest on housing loans will qualify for tax savings up to Rs 2 lakh each year. You will need to borrow about Rs 2 crore to buy a house with a home loan to save this sum. It is a different issue that Rs 2 crore can—with some smart moves—earn you close to Rs 2 lakh each month without the corpus being touched. The message is clear: the government is encouraging you to borrow to get a roof over your head.

At the races, Mahalaxmi, Mumbai The rich have had it good this time. (Photogrtaph by Fotocorp, From Outlook 16 March 2015)

Pension: There is a special tax deduction under Section 80 CCD savings for you if you put Rs 50,000 in the NPS. The promise of a secure future will be met by this contribution. The investment option within the NPS to grow your retirement money is not factored in; neither is the unimpressive return this scheme has earned been taken into account. What you get is an incentive to save in a scheme that will use your parked money to raise infrastructure.

Gold: Gold reserves in your home can now be monetised. The government will take the gold you have and treat it as a deposit to pay you an interest on it. The gold you lend to the government will be lent to jewellers and other users of gold who in turn need not buy gold. As an extension, the government will also issue sovereign gold bonds as an alternative to purchasing physical gold. The bond will carry a fixed rate of interest, and also be redeemable in terms of the face value of the gold at the time of redemption. So, you can earn from the idle gold you have at home; it is a different story that if it is jewellery that you lend to the government, you will not get it back, but only get interest on its value.

Service tax: Your wallet will be cleaned to keep the country clean. Consumption of services like mobile bills, insurance premiums, restaurant bills, cable bills, DTH bills, cab fares, among others, will go up by 2 per cent with service tax raised to 14 per cent from 12.36 per cent. In reality, it will go up further, because of the proposed 2 per cent ‘Swachh Bharat’ cess on some or all services.

PAN a must: Making pan mandatory on all transactions above Rs 1 lakh is a good move, but it will also encourage several businesses to function without billing. This runs against the plan to curb black money. For you, the cause of worry should be easy access to data on your transactions—letting the taxman make life a bit difficult.

Real estate: Curbing of black money may change the way the real estate sector functions in the country. This could result in housing finally getting affordable, but a lot needs to happen on ground on the black money front for some positive action to be visible on this front.

Equity: The proposal to defer GAAR by two years is good for the markets, because a lot of money that rides the market today could exit once GAAR is implemented. The two-year window is good for corporate India and markets. Corporate earnings and valuations favoured proposals such as lowering corporate tax to 25 per cent in phases.

Richie rich: The super-rich will have to shell out more money as tax as the budget has raised the surcharge payable by those reporting an income of more than Rs 1 crore a year. What someone earning Rs 10 lakh a month will pay out additionally is Rs 5,800 in tax every month. But that is an insignificant sum for someone earning seven-digit sum monthly. People in this bracket are likely to brush off the additional expense.The rich definitely have it going their way with the proposed move to remove wealth tax. This will allow them to thrive in the ambiguity of the definition of wealth that falls under the wealth tax.

In conclusion, for the common man in the 10 and 20 per cent tax bracket, where is the money to deploy the Rs 4.44 lakh to save taxes as suggested by the government? More importantly, my concern lies in the government’s intent to collect money in the name of tax savings, without focusing enough on taxpayers’ interests. One may argue that the government is giving taxpayers more money to save; it does not clarify that this additional money needs to be deployed where the government protects its present needs for funds, with the promise of securing your future. Yes, Arun Jaitley did mention that this additional savings will increase household savings and will facilitate a secure future for taxpayers and for all the people of this country. I differ, because, for the sake of a secure future, it puts the taxpayer’s present at risk.

(Narayan Krishnamurthy is editor of Outlook Money.)