Income limit for top tax rate in India far lower than peers

It is disappointing that the threshold income limit of Rs250,000 has not been increased when this limit is much higher in other countries, says Nikhil Bhatia*. In exclusive arrangement with CNBC.

The Budget 2006 is without any major surprises and is relatively straight-forward. Considering the changes that were introduced in last year's budget, the finance minister has decided to tread cautiously and has proposed minor changes.

No change in individual tax slabs
There is no change in the individual tax slabs or rates and consequentially no impact on the take home salary. It is disappointing that no attempts have been made to increase the threshold income limits of Rs250,000 which triggers the top rate of 30 per cent. A relative comparison with other overseas countries shows that though the maximum tax rate of 30 per cent in India is quite acceptable as compared to top tax rates existing globally, the threshold level of income which triggers this rate is much lower in India as compared to countries like China or Brazil.

For eg while an income of Rs250,000 and above will attract the highest rate of 30 per cent in India, in China the 30 per cent rate applies at income over approximately Rs2,600,000. In Korea, the top rate of 38.5 per cent applies on income exceeding approximately Rs 3,700,000. It is time Indian personal tax rates are aligned with international rates. This would allow more funds in the hands of individuals resulting either in increased consumption or savings, both of which are good for the economy.

Fixed deposits – a tax deductible investment avenue
Amidst tax deductible investment options available like life insurance policies, Public Provident fund, repayment of housing loans etc, cautious investors now have an option to invest their savings in "scheduled bank" fixed deposits with a term of five years and more and get a deduction of upto Rs100,000.

Maximum limit hiked under pension funds
In addition, investments in specified pension funds were deductible only to the extent of Rs10,000 within the overall limit of Rs100,000. This sub-limit has now been removed and therefore a deduction of upto Rs100,000 can be availed by all tax payers in respect of different investments/payments of their choice. This will, at the highest level, continue to give the relief of Rs33,660 to the individual tax payers.

There is therefore a greater flexibility in determining the saving avenues. At the same time, individuals earning a basic salary of approximately Rs835,000 and above will exhaust this limit of Rs100,000 in the provident fund contributions itself. Therefore savings in other investments even if eligible would be inconsequential from the tax perspective. Thus in the absence of a threshold for tax rates being increased, there is a good case for increase in the limits of Rs100,000 under section 80C to say Rs300,000 and have a separate limit for repayment of housing loans.

Apart from this change, specific deductions which will continue to be available as earlier are: interest on housing loans, medical insurance premium, deduction for disabled dependents, loan on higher education etc.

Long term capital gains only if you invest in NHAI, REC
Earlier, individual investors could exempt their long term capital gains if they made investments in specified bonds (NABARD, NHAI, REC, NHB and SIDBI). It is now proposed to narrow the scope of these specified investments only to bonds issued by NHAI or REC and which are redeemable after three years.

PAN may be mandatory on purchase of luxury items
In addition to the existing category of individuals requiring a Permanent Account Number (PAN), it is now proposed to notify certain specified transactions where also quoting of PAN will be mandatory, notwithstanding the income limits. The rules will be notified in due course and it remains to be seen if consumer expenditure on purchase of luxurious products like plasma TV or payment of fees to high end schools would require a PAN.

One by six criterion abolished
The one by six criterion of filing tax returns, for individuals owning a house, vehicle, incurring expenditure on foreign trips, holder of credit card or member of club has now been abolished. These persons now no longer need to file tax returns under this one by six scheme.

Securities transaction tax hiked
The banking cash transaction tax of 0.1 percent which pinched individuals if they withdrew more than Rs25,000 on a single day continues for some more time. The securities transaction tax (STT) rates have been hiked by 25 per cent across the board. Therefore while the good news is that long term capital gains on listed securities continues to enjoy the tax exemption, the individual investor shells out 0.125 per cent of the value of the purchase / sale of an equity share (delivery based) vis-à-vis 0.1 per cent that he had to pay currently. Therefore effectively, on a purchase of Rs100,000, an investor will now pay Rs125 as STT as against Rs100 payable earlier.

FBT on superannuation no more
A large section of the industry and salaried employees were expecting this budget regarding the Fringe Benefit Tax (FBT) levy on the superannuation fund retiral benefit. Majority of the employers were exploring the possibility of doing away with the existing superannuation schemes thereby impacting the long term savings avenues of the employees. The Budget has somewhat diluted the impact of the FBT on this retiral benefit.

Now, the FBT levy will be only on employer's contribution to superannuation fund in excess of Rs.100,000 per annum per employee. This is a welcome relief to both employers and employees and it is expected that a large quantum of the employers' contribution will be spared from the levy. Now, companies can actually explore introducing the superannuation fund retiral benefit in their compensation structure as it meets the objective of significantly adding to employees' long term savings as well as being a reasonably tax efficient retiral scheme.

With a large number of private insurance players in the health insurance market, it is proposed that any premium paid by an employer to cover health insurance of his employee or any reimbursement of health insurance premium paid by the employee for self/his family is not taxable as a perquisite provided the scheme is approved by the Insurance Regulatory Development Authority. Earlier only insurance schemes approved by the Central Government were eligible for such tax breaks.

Overall, though an attempt was made to increase the flexibility in the investment avenues available to an individual, and not cause any additional tax hardship to an existing individual tax payer, there have been no specific changes or measures to alleviate the tax burden.

*The author is Partner, BSR & Co.