Budget 2018 – Why Salaried Income Tax Payers Have A Strong Case For Standard Deduction

Standard deduction on salary was available to individual income tax payers till 2006.

In its representation to the Finance Ministry, the Federation of Indian Chambers of Commerce and Industry sought re-introduction of standard deduction for salaried income tax payers in Union Budget 2018.

“Keeping in mind the rate of inflation and purchasing power of the salaried individuals,” it said, “Re-introduction of the standard deduction for salaried employees to at least Rs 1,00,000…(will) ease the tax burden of them.”

Standard deduction on salary was available to individual income tax payers till 2006, when it was done away with by the then UPA government. Only one per cent of Indians pay income tax and the salaried employees form a majority of income tax payers in terms of absolute numbers.

However, the salaried class’ contribution in income tax collection is not much in terms of volume, primarily because they occupy bottom layers of the personal income tax payers. This makes a strong case for re-introduction of standard deduction on salary in the Union Budget 2018 by Finance Minister Arun Jaitely.

WHY FOR SALARIED PEOPLE?

Unlike self-employed individuals, super-rich farmers and businessmen, salaried people are at disadvantage in terms of income tax liabilities. Income from agriculture is not taxed. People engaged in agriculture get a variety of subsidies and rebates irrespective of their annual income.

A business professional gets a range of deductions in the name of legitimate business expenditure including expenses incurred on office rent and staff. They are also entitled for deduction on travel expenses, customer entertainment expenditure, fuel bills, driver’s salary, fees paid for undertaking skill development programs and even for expenditure incurred in subscribing business journals.

These deductions lower their income tax burden and give them with more money in hand to maintain their quality of life. But, a salaried person is not allowed similar deductions and left to fend off inflation with limited income at a time when cost of living is perennially rising.

SOME SPECIFICS

Salaried income tax payers enjoy only a few tax free allowances. One example that is often cited by the employees is the exemption on up to Rs 1,600 per month for transport allowance.

Someone living in Delhi, even if she travels by Delhi Metro, has to pay on an average somewhere between Rs 70-100 as train fare besides what she spends on her last mile journey. Tax exempted on a transport allowance of Rs 1,600 is too meager in her case.

If someone is employed in a job that requires tele-calling or round-the-clock customer services – and this includes banking and even journalism – there is a limit on reimbursement for the phone bill. Beyond this limit the person loses money from salary which puts her at great disadvantage.

Further, if an over-enthusiastic salaried professional enrolls in a course to hone her skills – say software or communication skills – she is not entitled for a tax deduction unlike her counterpart from business class.

In some cases, where employers do not give a specific house rent allowance component in employees’ salary, the maximum deduction available for the salaried person is Rs 2,000 a month – unchanged since 1998. This is utterly out of sync with present-day realities of even tier two or tier three cities and towns.

There is a cap on reimbursement against medical expenses at Rs 15,000. There has been demand that this limit be raised to Rs 50,000 given the rising cost of healthcare in the country with public hospitals becoming least favoured by even lower income group people.

Standard deduction would offer some parity between salaried and non-salaried personal income tax payers.

PRACTICE ELSEWHERE

An Indian individual income tax payer’s liabilities are calculated on her gross salary. But, if she migrates to countries like USA, UK, Germany, Japan, Thailand or even Singapore for the same job and remuneration, she will get an allowance in the form of standard deduction for expenses related with salary income.

With technologies changing at a fast pace, every employee needs to upgrade her skills, and considerable expenses are incurred on undergoing training, purchasing books or acquiring some specialisation required on job to sustain in the employment market.

In the US, a standard deduction of USD 6,300-12,500 (Rs 4.3-8.5 lakh) is available to salaried employees. Corresponding figure in the UK is GBP 12,000 (Rs 10 lakh), 1000 euros (Rs 73,000) in Germany and in Singapore, it is 1,000 Singaporean dollar (Rs 48,000).

Before being taken away, an Indian salaried employee could claim a flat standard deduction of Rs 30,000 from her salary income or 40 per cent of it (for annual salary under Rs 5 lakh) and Rs 20,000 (in case of annual salary exceeding Rs 5 lakhs).

There have also been demands for increasing the tax relief on savings beyond existing limit of Rs 1.5 lakh.