February 1, 2018

Both will pinch: withdrawal of tax exemption on medical and transport allowances and a higher cess on your IT

The change

Not much has changed – to the big disappointment of salaried taxpayers, especially those below 60 years of age. What the Finance Minister has given with one hand, he has mostly taken with the other. So, while standard deduction of Rs.40,000 has been allowed for salary income, the tax exemption on medical expense reimbursement (Rs.15,000) and transport allowance (Rs.19,200) has been removed. Ergo, salary earners get a net reduction in taxable income of just Rs.5,800 a year.

For a salaried taxpayer who currently also gets medical and transport allowance (generally those employed and aged less than 60), the net tax benefit, excluding cess, will range between Rs.290 (for those in the lowest 5 per cent slab) to Rs.1,740 (for those in the highest 30 per cent slab). This meagre benefit too will be chipped away by the increase in cess on tax from 3 per cent now to 4 per cent.

For high salary earners, the outgo due to increase in cess could, in fact, be more than the tax saved. But for salaried taxpayers who do not get medical and transport allowance (generally those aged 60 or more earning pension income), the standard deduction of Rs.40,000 could mean some good tax savings – Rs.2,000 (for those in the 5 per cent slab) to Rs.12,000 (for those in the 30 per cent slab) excluding cess. But in this case too, the benefit will be reduced by the increase in cess on tax.

The background

Hopes were running high. Individual taxpayers expected a sharp increase in the tax exemption limit (currently Rs.2.5 lakh for those under 60, Rs.3 lakh for those aged 60 up to 80, and Rs.5 lakh for those aged 80 and more). They also hoped for an increase in the Section 80C investment limit (currently Rs.1.5 lakh), higher tax breaks on medical reimbursement and children’s education allowance, and increase in tax deduction on interest payment on home loans (Rs.2 lakh currently).

After all, the last major tax breaks came during the July 2014 Budget. Inflation has eroded the tax benefits, and with the 2019 general election just about a year away, taxpayers hoped the Government would finally heed their demands. But the Finance Minister has thought otherwise, maybe due to a tight fiscal position. He restricted his largesse to the elderly who have been given higher tax breaks on health insurance and interest incomes. For salary earners below 60, the wait continues.

The verdict

Big hopes have been dashed, again.

[The Hindu Business Line]