Ketan Dalal, MD, Katalyst Advisors, says the tax rate at 39% maximum and the maximum starting at just over 10 lakhs is very high. And I think the slab of 10 definitely needs to be increased whether it is to Rs 20 lakh or Rs 15 lakh or Rs 25 lakh is something which I am sure they will have to do the budget there.
Although it is a vote on account on February 1, in the 2019 interim budget, we got a lot of surprises from the Modi government and a lot is being said to be happening on the same lines in this vote on account also. The analysis so far is that 60% of taxpayers are still with the old tax structure because one gets the benefit on home loan interest deduction over there. So, should we be expecting any changes or any kind of additions, especially on the home loan interest deduction?
Ketan Dalal: Yes, as you yourself mentioned, this is a vote on account, but yes, one cannot rule out the possibility of some sops within the electoral constraints. So, let me broad-base your question on home loans into three parts. One is in relation to housing, second is in relation to education, and third is medical and all of these are significant sorts of pressures on the wallet. And home loans, of course, are very important and the amount of home loan deduction is very small, only Rs 1.5 lakh.
I am not sure whether to call it an expectation, but certainly it is a demand that the cap should be increased. But the broader issue is also that 60% are under the old regime and when you use the word salaried class, it is important to understand that salaried class is a very generic term. A person drawing Rs 5 lakh is salaried class and a person drawing Rs 5 crore is also a salaried class. The number of people in the higher slab is now slowly increasing.
So, the Rs 10 lakh minimum threshold for the highest rate to kick in is also very unreasonable. It really needs to be raised and I think the rate of 36% or actually 39% assuming loan claim and deduction is also very high. It is not just a question of home loans, one has to look at it holistically. But I am not sure how much can be done or will be done on February 1 but certainly one hopes that when the new government is in place, say June or July, one would be hoping that there is a reduction in rates, an increase in slabs, and not only the home loan, but also education and medical are also dealt with as a sort of holistic package for individuals.
A lot of analysts and reports are also saying that looking at the interest towards the old tax regime, the government might just also look into increasing the basic exemption limit. NPS is very close to the Modi government also, so a lot of tweaking and especially having the option of guaranteed pension can also be included. For a long time, we haven’t seen any additions as far as investment instruments are concerned in the 80C section, along with the Rs 1.5 lakh limit. So, can we expect something on these lines?
Ketan Dalal: If you see the trend of tax legislation over the last few years and it is not only for individuals but also for corporates. The whole trend is towards simplifying the law and the more exemptions you put in, the more complexities you create. I think that the better way to address it is to reduce the rates of tax rather than doing all these complexities.
One of the reasons the PPF scheme has been successful has certainly been 80C without doubt and there again, the limit of 1.5 lakhs and as you know very well it is not only for PPF but it is for a whole basket of things and the section goes on and on and on for five pages and by the time you come to the end, you forget what the beginning said, it is just too complex.
So, one, it is better to reduce the rates of tax and I do not know whether that is an expectation or a demand and I think it is both, if at all one wants to go down the path of giving incentives, I absolutely agree that 1.5 lakhs is neither here nor there, particularly because it is for a whole basket of things and it is not just for PF or PPF.
I think the better thing would be to reduce the rates of tax without doubt because that may also make the laws simpler and make it more equitable because remember that even corporates are taxed at 25% now and to have a 39% rate at the maximum level and for a tax rate maximum to start at Rs 10 lakh is very aggressive to my mind.
What would be your expectation as a taxpayer?
Ketan Dalal: As I mentioned already, the tax rate at 39% maximum and the maximum starting at just over 10 lakhs is very high. And I think the slab of 10 definitely needs to be increased whether it is to Rs 20 lakh or Rs 15 lakh or Rs 25 lakh is something which I am sure they will have to do the budget there.
The second point is if at all you are giving incentives for savings, you have to increase it. But as I said at the beginning of this conversation, three things need to be addressed. One is the home loans part, second is medical and the third is education because these three things are causing the maximum drain on the pocket. That is one part of it.
Second, look at ESOPs. In between for many years, when the market was not doing well, ESOPs were “out of fashion”. Now ESOPs have become important and the taxability of ESOP, because this is also a matter of individual taxability. As for the taxation of ESOP, there has been a long-standing demand that you cannot have a tax in the stage of exercise of an option because at that stage, you are not getting money. You should have it in the stage of monetization. So there is a whole bunch of things like this.
But then there is a third item which I want to pick up. Whilst we are talking of individual tax, remember, individuals often collaborate in the form of partnerships or LLPs. So let us say a professional or even a freelancer wants to get together with another freelancer. Now, it may not seem like individual tax, but we need to recognize that two individuals coming together or three individuals coming together and carrying out a profession or a business in the form of an LLP or partnership, that rate is also 36% compared to 25% for corporates.
I think the reason is that the government seems to believe that because the dividend is taxable in the hands of the shareholder, whereas the LLP and partnerships are a single point taxation therefore, the 36% is justified. But I do not think it is that justified. And LLPs and partnership rates of tax also need to come down because that is nothing but another form of individual taxation.
It is an individual being taxed in a different form because that is the way his commercial needs to carry on his profession or his business. So I think this would be one. So one is the rate of tax. Second is partnership and LLP rate of tax. Third is that the minimum slab rate needs to go up. Fourth is ESOP tax. And fifth, I would say is, as I said, some kind of reliefs for home loans, education and medical.
Apart from this, if we have to focus on structural changes in NPS and introduction of minimum guaranteed pension scheme, how much do you think this will make NPS as a retirement product really attractive? There are tax benefits as per 80C and 80CCD that you get by investing in NPS, but the withdrawal is taxed in the sense of you have to buy an annuity which will be taxed when you get it in your hand. Alsom if there is an option of getting a minimum guaranteed pension, do you think this will really add on to this entire product?
Ketan Dalal: Whether the arithmetic works out for the government and what are the fiscal implications, I would not be able to say. But from an ask perspective or an attractiveness perspective, certainly the minimum guaranteed pension will help. But there is one additional point I want to make about NPS. You have an NPS-1 and an NPS-2. The NPS-2 does not involve an annuity. It functions like a mutual fund. But the NPS-2, although functioning like a mutual fund, does not have the tax benefits of a mutual fund. So it may also be necessary to address NPS-2, although really NPS-1 affects a much larger proportion.
By the way, you cannot create an NPS-2 unless you have an NPS-1. So you can create an NPS-1 with say Rs 1 lakh and you may have Rs 1 crore in it.
So, you mean the Tier-1, Tier-2 account under NPS?
Ketan Dalal: Correct. Tier-1, Tier-2. Sorry. That is the correct terminology.
I did ask you a question on if you were a taxpayer and if you had to present your demands. Let me also ask this question. If you were a finance minister, what kind of budget would you present?
Ketan Dalal: I have already said that I am not the finance minister. And there are electoral constraints, of course. But more importantly, the fact that the elections are coming up and this is a vote-on account, many of the things that we discussed, to be realistic and not to be overly optimistic, I hope some of them get addressed on February 1 but I suspect that the majority can be addressed only when the full budget is presented.