Typically, ahead of the Union Budget, this column deals with the likely government borrowing in the next financial year and its impact on bond yields. Instead of walking the trodden path, let me focus on something else.
The provocation is Finance Minister Nirmala Sitharaman’s recent comment: “I belong to the middle class and identify myself as middle class so that I can understand them. The Modi government has not levied any new tax on the middle class in any Budget so far. No tax levied on people who earn a salary up to Rs 5 lakh.”
Ever since she made this statement this month, the term “middle class” has sneaked into cocktail circuit discussions.
Roughly, one in every three Indians is middle class. The share of them — with annual household income between Rs 5 lakh and Rs 30 lakh — more than doubled from 14 per cent in FY05 to 31 per cent in FY21. It is projected to rise to 63 per cent by FY47, when independent India turns 100, according to a survey by economic research outfit People Research on India’s Consumer Economy.
In a nation of 1.4 billion people, only 2.56 per cent pay income tax; a majority of them belong to the salaried middle class.
In February 2014, Narendra Modi, then chief minister of Gujarat, had said he was committed to bring back black money stashed overseas and assured people that if the Bharatiya Janata Party was voted to power, he would set up a task force, amend laws and distribute the money brought in as a “gift” to honest taxpayers. Five to 10 per cent of money thus brought in would be gifted to the salaried class and honest taxpayers, Modi had said at a “Chai pe Charcha with Namo” campaign in the run-up to the general elections.
Will the Budget have some goodies for the salaried class?
Let’s look at the current structure of tax and exemptions. I am referring to the old tax regime as most salaried employees have opted for that because of the exemptions available.
# For salaries up to Rs 2.5 lakh, there is no income tax.
# For salaries between Rs 250,001 and Rs 5 lakh, 5 per cent tax is levied above Rs 2.5 lakh. This works out to Rs 12,500. But this group of employees can get a rebate of up to Rs 12,500 (under Section 87A of Income Tax Act), making the salary tax-free.
# For salaries between Rs 500,001 and Rs 10 lakh, the tax obligation is Rs 12,500 plus 20 per cent tax for salary earned above Rs 5 lakh. For those who earn Rs 10 lakh, the tax is Rs 112,500.
# For more than Rs 10 lakh, the tax obligation is Rs 112,500 plus at the rate of 30 per cent for money earned above Rs 10 lakh.
At the current rates, an employee who earns Rs 5 lakh annually doesn’t pay any tax; for Rs 10 lakh, the tax is 11 per cent; Rs 25 lakh, 23 per cent; Rs 50 lakh, 27 per cent; and for Rs 1 crore, 32 per cent. Of course, the slabs are not meant for only salary; they include income from all other sources.
Then, there’s a 4 per cent surcharge (inclusive of health and education cess). For persons having income more than Rs 50 lakh and up to Rs 1 crore, this goes up to 10 per cent; for income above Rs 1 crore and up to Rs 2 crore, it is 15 per cent.
Even though 10 per cent tax is deducted at source, the employers cut the entire tax applicable to an employee after taking into consideration the so-called standard deductions.
What are the exemptions available for different kinds of investments? Under 80C, 80CCC and 80CCD (1), total exemption is Rs 1.5 lakh for life insurance premium, provident fund, national savings certificates, among others. It also includes payment of the principal amount of a housing loan.
There are other exemptions such as up to Rs 50,000 for payments towards the national pension scheme [Section 80CCD (1B)]. Besides, for government employees, 14 per cent of salary and, for others, 10 per cent for contributions made by the employer to the national pension scheme are exempted from tax.
Now, other exemptions. Interest on housing loans for a self-occupied property enjoys tax exemption up to Rs 2 lakh (besides Rs 1.5 lakh for principal). This was fixed in 2014. Since then, the prices of houses have gone up substantially and so have the interest expenses. Incidentally, those who rent a property out can get tax exemption on the entire interest outgo. Why this anomaly?
For health insurance and check-up, Rs 25,000 is exempted for self/dependent/spouse. The amount is double for senior citizens. For the same purpose, there are Rs 25,000 exemptions for parents below 60 years of age and Rs 50,000 for senior citizens. Is the amount enough when both cost of treatment and insurance premiums are rising?
For house rent, in most cases, the exemption is available on actual rent paid minus 10 per cent of basic salary. This is when the rentals have gone over the roof. In many cases, part of the rent is funded by the taxable component of the salary. Isn’t it also time to revise the metro classification of cities under the IT Act and bring Bengaluru, Hyderabad, Jaipur, Surat and few other places under this bracket?
On children’s education, a salaried person gets an education allowance of Rs 100 per month for two children, maximum. Hostel expenditure is kept at Rs 300, again for two children. The limits, set in 1997, were never revised. This, too, is part of the overall deduction available under 80C, which often gets consumed by only one of the components such as deduction towards provident fund or principal payment of housing loan.
Incidentally, GST is applicable on health insurance and life insurance policies as well as books and stationery one needs for education.
The 2018 Budget introduced standard deduction in the form of Rs 15,000 reimbursement for medical expenses and Rs 19,200 for transport. Next year, the overall limit was raised to Rs 40,000 and in FY20, to Rs 50,000. This is irrespective of the level of the salary. Don’t lifestyle related expenses (including cost of transport) rise with the rise in salary? Should it remain flat?
Employees also get exemptions in the form of leave travel allowance (LTA). But the exemption is only for actual travel cost (flight, rail or bus fare to reach the destination) and it does not cover local conveyance, expenses for sightseeing, food and hotel accommodation. This means, if the employer gives an LTA of Rs 30,000 and the travel cost is Rs 20,000 but overall cost of the holiday is Rs 50,000, the employee gets tax benefit only on Rs 20,000 and needs to pay tax on Rs 10,000.
If an employee owns a car, there’s an exemption on maintenance and running expenses, including driver’s salary to the extent of Rs 2,700 per month (for a car with engine capacity up to 1,600 cc) or Rs 3,300 per month (engine capacity above 1,600 cc). What is the cost of petrol per litre? How much does one need to pay to keep a driver in Mumbai? Looks like a joke. CORRECTED
A bigger joke is the meal voucher. An employee can get a tax-free meal voucher of Rs 50 for 22 working days, two meals a day. Even at the Parliament canteen one won’t be able to eat at this price. After the subsidy stopped in 2021, at the canteen, a vegetarian buffet cost Rs 100 and non-vegetarian buffet Rs 700. Hyderabadi mutton biryani, which used to cost Rs 65, is now priced at Rs 150 and the price of boiled vegetables has risen from Rs 12 to Rs 50.
While the tax slabs may be reasonable, many exemptions have become anachronisms. It’s time to revisit them, taking into consideration the cost of inflation. One way of doing that could be the removal of all exemptions and a much higher slab for tax-less income. Addressing the middle-class woes will have a positive impact on the savings to GDP ratio, which is at its 19-year low now, the consumption story, and boost growth in the world’s fifth largest economy.