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Seniors citizens need tax-free investments

 

 

ANNUAL budgets should normally be a statement of government finances. However, customarily, in our country, the Budget has become a forum where the government also declares its intended taxation and fiscal policy for the year. This year however could be an exception. The new Tax Code with its sweeping changes is anyway going to be applicable from next year, so there is really no point in ringing in big ticket changes on the taxation front for all of just one year.

In any case this time around the emphasis will be on fiscal consolidation and managing the fiscal deficit. With demand and credit off take not picking up, rolling back of the fiscal stimulus is not going to be an easy exercise.

That being said, the following are some aspects that the Finance Minister could consider that will help the common taxpayer –


1. Reinstate standard deduction. Homeowners/landlords get a 30 per cent standard deduction. Businessmen can set-off every expense that they incur to earn income. Then why treat the salaried differently?


2. Transport allowance deduction has remained at an absurd level of Rs 800 per month. This is almost insulting to the employee.


3. Then there is the issue of deduction for medical expenses. Spiraling health care costs are a reality and there is no system of government sponsored health plans. In such circumstances, having a paltry limit of Rs 15,000 in which the employee is expected to cater to the medical expenses of his entire family borders on the farcical.


4. The government wants to encourage education. However, education allowance for children has remained static for over twelve years now at Rs 100 per month per child for a maximum of two children (earlier it was Rs 50). Ditto for hostel allowance at Rs 300 per month per child. The tuition fees deduction is included in an already overcrowded Section 80C. For many taxpayers, statutory payments like provident and superannuation contributions, home loan installments and insurance premiums make up the limit. There is no room left to claim the deduction for fees. A separate deduction for the same would be welcome.


5. There is actually one area where the salaried are better off than self employed people. Or more precisely those self employed persons who stay in rented places. Most of the salaried get HRA and the consequent HRA deduction. But if a self employed person were to pay rent, the rent deduction available to him is a paltry Rs 24,000 per year. Most people pay this much rent (if not much more) per month!!


6. Over the past few years, interest rates have been on the decline. This has hit the common man where it hurts the most. The average rate of interest offered by banks to their fixed deposit holders is in the range of 5.50 per cent per annum to 7 per cent per annum depending upon the tenure of the deposit. Again, this is fully taxable. If you factor in the tax, the rates fall to 3.8 per cent to 4.8 per cent per annum. Then of course, there is inflation.


While the current rates on small savings provide some kind of succour, the more popular amongst them such as Post Office MIS or PPF or even the Senior Citizens Savings Scheme come with their own ceiling beyond which an investor cannot go.


What the common man, especially senior citizens require is some sort of a tax-free investment avenue. It was in July 2004 that the 6.5 per cent tax-free bonds were discontinued. Simultaneously, Sec. 80L that offered a tax break on interest from investments was also dropped. So now, citizens are tackling the triple whammy of low interest rates that are fully taxable without any relief from either inflation or taxes.

To sum up


Apart from the above there are a few other issues such as applicability of exemption on capital gains to buybacks and open offers, taxation treatment of derivative transactions, distinction between a trader and an investor (as tax treatment for both differs) etc., that have long been left unaddressed. These are essentially legacies of previous years' budgets where rules were changed but certain indirectly affected constituents of the system were left out.

What will actually pan out only time will tell. However, when it does, watch this space for a comprehensive analysis.

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