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Budget 2021 Impact Analysis


At Tax2win we have been following The Budget 2021 very closely. Our team of expert CA's, CS, Advocates and Lawyers have done an in-depth analysis of various budget pronouncements. Read more...

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Pre-Budget 2021 – Tax Treatment Expectations

The FY22 Union Budget on February 01, 2021 comes in the midst of an ongoing global pandemic, which has materially altered the socio-economic stance inside & outside state borders. Pushing India into a recession, we witnessed our 1st GDP decline since 1996. Given the backdrop, the country is set to breach its already stretched FY21 estimates.

Key macro indicators in GDP, fiscal deficit and interest rates are to be governed liberally by Govt.’s and Central Banks as they look to facilitate growth and crawl into a post-covid economy. India’s RBI has acted early in setting inflation woes on the backfoot while developing visibility on revenue streams to meet & match package & policy expenses. Results have followed suit as economic recovery has surprised pleasantly with Q3 FY21 poised to turn positive after -23.8% in Q1 FY2021.

Unsurprisingly, the FY22 budget is to revolve around COVID-19, to directly and indirectly address channel-checks. We can see host of regulatory support to sectors most affected (e.g., hospitality, retail, aviation). In addition, infrastructure, agriculture, domestic manufacturing, and housing can take centerstage too. In essence, govt is likely to continue with counter-cyclical measures to support an economic recovery by enhancing public expenditure, providing incentives to employment-generating sectors and boosting demand.

Privatization, asset sales, PSU equity offerings (Air India, LIC) and off-balance sheet borrowings can be resorted to manage fiscal math. Overall, expectations are running high though the government has limited elbow room to provide the required fiscal boost to the economy.

While much of the aforementioned is broad-based and trickling in economic nature, here are changes we foresee which harbor direct impact on the everyday Indian:

  • Inclusion Of Covid -19 Hospitalization Expenditure Under Section 80DDB
    Income Tax Act’s section 80DDB makes room for exemptions incurred on medical expenses of specified diseases. Deductions are capped at Rs.40,000 and Rs. 1,00,000 for individuals’ senior citizens respectively. India, even today has more than > 1 crore live cases, with nearly as many having been cured. The monetary impact in dealing with the same squeezed pockets at a time when income flows came to a standstill. Hence, we expect extension of deduction limits of for both citizen classes.

  • COVID Cess:
    In response to the global pandemic, GoI opened up its coffers to fund mega stimulus packages which has helped the economy sail through the storm relatively unscathed. We expect heavy public expenditure to continue into key sectors of infrastructure Consequentially, the government has borne deep revenue & reserve losses. With revenue streams running dry, Covid Cess can be a viable measure to streamline revenue generations. If introduced, we expect the same to be levied on the higher income groups.

  • Increase Medical Insurance Premium Limit Under Section 80D:
    In 2021, we continue to battle a 2019 viral disease. Recent times have stressed on the importance of having insurance across parameters such as life and health. Per LIC’s handbook (Dated 2018-2019), > 5,00,000 Indians possessed any form of health cover. Per Income Tax Act, Section 80D counsels deductible limits on expenses attributed to medicine-oriented premiums and expense. Currently, Rs. 25,000 & Rs. 50,000 is upper limit enjoyed by self and seniors respectively. Given the backdrop, we foresee self’s limit to be stretched to Rs. 50,000 too.

  • Introduction Of Marginal Relief In Cases Where Taxable Income Is Slightly Higher Than Rs. 5 lakh:
    The budget last year saw the introduction of new tax regimes, highlighting broader visibility in income segmentation vis-à-vis tax slabs. Those opting for the new regime were to opt away from almost all tax breaks that the vintage structure prescribed. This concept led us to think along the lines of marginal relief, wherein, increased tax liability by minimal %age shall be forgiven, given the leakages in revenues in the year past. In figures, Individuals whose taxable income is Rs. 5,00,000 wear zero tax liability while those with taxable income of Rs. 5,00,200 accrue Rs.13,000 in taxes, courtesy of extra Rs. 200 income. The Introduction of marginal relief can be a viable solution to rid surcharges in such menial instances.

  • Increase Home Loan Deduction:
    India’s covid-hit economy cost the real estate sector dearly due to cash flow disruptions and labour-loss. Affecting consumption as much as production, central and state govt.’s announced multiple relief structures such as “Special Window for Affordable and Mid Income Housing” scheme, reduced stamp duty charges and premium levies on developers amongst others. India has witnessed a run of property price increases annually where even a modest metro 2-BHK home now costs upwards of Rs 70-80 lakh. Assuming a loan to cover 75% of the value of the property, the buyer still requires a loan of Rs 50-60 lakh. Per the Income Tax Act, the deduction on housing loans is accounted for under Section 24. We expect an increase in the upper cap on interest paid from current Rs. 2 lakhs to at least Rs 3 lakh, given the multiplier effect of promoting housing at scale.

  • Increase The Deduction Limit Of NPS Investment And Make Redemption Completely Tax Free:
    The NPS serves as a key retirement product, with it positioned as pseudo income source in post-work age. Recent survey revealed, majority Indians consider retirement to be least important financial goal, after noting how retirement is only financial product for which no loans can be sourced. Covid-19 stress led to 50% of retail customers rushing for loan moratoriums (RBI Study) to curb pandemic woes on brain & bank. In light of this information, we expect the budget to inculcate financial healthy habits for wealthy savings by increasing current ₹ 50,000 tax exemption limit in NPS investing to ₹ 1,00,000 (Section 80C). At present NPS account holders can withdraw 60% of corpus on vesting age in a tax-free manner with remaining (40%) being subject to annual annuity tax. Akin to PPF, NPS withdrawal must be deemed completely tax free.

  • Increase The Threshold Of Section 80C:
    Section 80C is arguable the most familiar, albeit crowded, investment + insurance tax-efficient mix of the lot. It covers a wide range of line-items such as PPF, ELSS investments, insurance premiums, home loan principal payments and children’s tuition fee among others. The current limit of Rs 1.5 lakh is accrued by canopying various sections in 80C, 80CCC and 80CCD (1). This deductible amount was set in 2014, with it being revised just the before over the last 2 decades. It was In 2003, that this deductible was set at Rs. 1 lakh, thus making improvements amounting to meager 2.5% annually. This annual increase in deductions is not even at par with the inflation growth in the same period. Hence, given the gravity of this section, we expect either branching of this section into sub-sects or a much-needed expansion in upper limit on current deductible amount.

With the FY22 budget a stone’s throw away, we conclude this note with our top tax-implication expectations. In uncovering what lies ahead, India has the opportunity to not only be a significant part of the future, but rather, define it. Its degree of competitiveness is to be decided by the 1st paper-free budget come February. Till then we too wait to see how the budget tip-toes between populist and capitalist measures.

FAQs on Budget 2021

Q- What is the date of Budget 2021?

The Union Budget 2021 will be presented on Monday, 1st Feb 2021.

Q- From which date the Budget proposals will come into effect?

The Budget pronounced in the month of February becomes effective from the following 1st April till 31st March. For example, the Union Budget 2021 presented on 1st Feb 2021 will be applicable for Financial Year 2021-22 i.e. from 1st April 2021 to 31st March 2022.

Q- Who prepares the Union budget?

The budget is a detailed planning allocation of economic resources of the country for the upcoming fiscal year. Since it has a major impact on all the sectors, the budget is prepared in harmony with different ministries. Recommendations from all the ministries are submitted to the finance ministry for their demands, which is further analyzed by the budget division.

Q- Who will introduce Budget 2021?

Budget 2021 will be introduced by the Hon’ble Finance Minister Nirmala Sitharaman before the Parliament of India on 1st Feb 2021.

Q- What is the Interim Budget?

Interim Budget is presented by the ruling government when elections are due in between the upcoming fiscal year. Hence, the ruling government cannot make strategic decisions for the complete fiscal year in which it might or might not have the ruling powers. The last Interim Budget was presented in 2019 by Finance Minister Piyush Goyal.