Infrastructure Bonds - A sneak peek

The Budget for the fiscal 2010-11 introduced infrastructure bonds to facilitate financing of long gestation infrastructure projects. The government has notified an investment of up to Rs 20,000 in these bonds to be exempt from income tax over and above the Rs 1 lakh tax exemption under section 80C of the Income Tax Act.  This should result in an additional tax saving of Rs 2,000 to Rs 6,000, depending on the tax slab applicable to each investor.

Structure of Infrastructure Bonds: Amount invested in infrastructure bonds will be used to finance various infrastructure projects in the country. As per the specifications of the central government, infrastructure bonds are to be issued by IFCI, LIC, IDFC and any non-banking infrastructure finance company recognised by the Reserve Bank of India.

While IFCI has recently closed its issue of infrastructure bonds, LIC and IDFC are now set to launch their issues in coming months. The tenure for these bonds is 10 years with a lock-in period of five years. Thus, after a period of 5 years, the issuing company can buy back these bonds from investors.

Alternatively, the investor can choose to trade these bonds in stock exchanges. The issuing company shall offer two rates of interest on these bonds — one is when the investor chooses the buy-back option after the lock-in period and the other is when he chooses to hold on to the investment till maturity period.

Returns and Tax Treatment

Infrastructure bonds will carry an interest rate, which will be determined by the issuing company. The central government, however, has notified that the interest rate so payable shall not exceed the yield on 10-year government bonds. As the current yield on 10-year government bonds is around 8%, investors can expect these infrastructure bonds to offer a rate marginally lower than 8%.

IFCI, for instance, had offered investors an interest rate of 7.85% for bonds with a buyback option after 5 years and 7.95% for bonds without the buyback option and redeemable after 10 years. IDFC, whose bonds have hit the market yesterday (click here), is likely to offer an interest rate ranging from 7.5- 8%.

Investors can opt for either an annual payout of interest or allow the same to be compounded annually and payable only on maturity. Though the principal amount of investment — up to Rs 20,000 — is exempt from tax, the investor shall be liable to pay tax on the amount of interest earned from such an investment. If the investor chooses to trade these bonds in the exchanges after the lock-in period, any gains accrued thereon shall also be subject to long-term capital gains tax.

5-year Tax Saving Bank FD v/s Infrastructure Bonds

As infrastructure bonds have a lock-in period similar to that of a tax saving bank fixed deposit and are expected to offer interest rates similar to the ones being currently offered by banks on their fixed deposits, it is very natural for investors to contemplate as to which one of the two is a better tax-saving avenue.

A 5-year tax saving bank FD is part of the existing 80C basket with a maximum exemption limit of Rs 1 lakh, an investment in infrastructure bonds is an additional exemption of Rs 20,000.

Thus, in case you have already exhausted the exemption limit of Rs 1 lakh through investments in Public Provident Fund (PPF), Employee Provident Fund (EPF), LIC Premium, Repayment of Principal on housing loan etc., you have to opt for infrastructure bonds rather than bank FDs.

As far as the returns from these two instruments are concerned, let us assume an interest rate of 7.85% (as offered by IFCI) for the 5-year infrastructure bond (with buy-back option) and an interest rate of 7.5% on a 5-year tax saving bank FD — as is the prevailing interest rate being offered by most banks.

Thing to note here is that the interest in case of a bank FD is compounded quarterly, but is annual for infrastructure bonds.

Given the above interest rates, an investment of Rs 20,000 shall fetch a pre-tax interest income of Rs 8,999 in the case of the bank FD and Rs 9,183 in the case of infrastructure bonds after a period of 5 years. Thus, it is not the yield on maturity, but the benefit accruing at the time of investment that needs to be considered before making an investment decision.

Risk Element: While there is no risk as far as the underlying asset of these investments is concerned, the embedded risk lies with respect to the institution offering these bonds. It is thus important for investors to carefully scrutinise the credibility of the institution offering these bonds. Moreover, there is still an uncertainity on the future of this mode of investment since with DTC in 2012, there is no mention of these bonds.

There are various articles on internet on this -

1. Economic Times
2. Rediff.com

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Buying ULIPS will Cost Less Now

Insurance Regulatory and Development Authority (IRDA) has announced new set of guidelines for ULIPs. They will now cost lesser but have a longer lock-in period.

IRDA, on Monday, said that insurers will now be allowed to charge up to 4% on annual premium paid on Ulips for the first five years, and thereafter charges will be reduced during the tenure of the policy. For plans of 15 years and above, the charges will be restricted at 2.25% of the yearly premium.

IRDA has also increased the lock-in period for all Ulips from three years to five years now, including the top-up premiums. The decision is expected to make these products more like long-term financial instruments that can provide risk protection. Longer lock-in would also discourage those insurance buyers who often entered Ulips, which are market-linked products, for short term gains. The regulator also increased the insurance cover on such products to 10 times of the first-year premium compared to five times now.

[source]

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MoneyControl.com in discussion with Subhash Lakhotia on Budget 2010

In an interview with CNBC-TV18, Subhash Lakhotia, Tax Guru; Sanjay Sinha, CEO of L&T Mutual Fund and Kamesh Goyal, Country Head of Bajaj Allianz Life Insurance evaluate the Union Budget and its impact on your wallet. Below is the edited transcript of Subhash Lakhotia, Kamesh Goyal and Sanjay Sinha’s exclusive interview on CNBC-TV18. Also watch the video.
Q: Upto Rs 50,000 seems to be the benefit—more so for people who are earning above Rs 5 lakh—Rs 5 to 8 lakh and of course above Rs 8 lakh as well gets the Rs 50,000 benefit. But under Rs 5 lakh earners seem to be getting a lesser benefit?
Lakhotia: Yes, the individuals having income upto Rs 50,000 to Rs 5 lakh will save Rs 20,000 and individuals having income of Rs 8 or 10 lakh they will save nearly Rs 50,000 income tax saving. But the worst part is the common man having income Rs 25,000 per month—his saving is a big zero. Not a single rupee saving inspite of the fact we are having big rise in inflation and other things in the country—it’s still the poor man or the common man with income of Rs 25,000 per month—no income tax saving at all because the initial exemption limit has not been changed—that’s the big problem.
Q: When we were talking ahead of the Budget, you had asked for an increase in the exemption limit under 80 C. The FM has left that totally untouched.
Lakhotia: No changes made in 80 C—Rs 1 lakh continues and this Rs 20,000, which has been made is a separate section 80 CCF. That is also only in the case of infrastructure bonds. My emotions are taken away. If he would have increased from Rs 1 lakh to 2 lakh—it would have been best one but this Rs 20,000 forced to make the investment in infrastructure bonds only.
Q: Maybe somewhere the Minister had the Direct Tax Code in mind. The Direct Tax Code does talk of an exemption increase to Rs 3 lakh for instance—the draft one. The FM hasn’t moved anywhere closer to that although on the basic exemption, the FM has tried to move in that direction—very small steps compared to what the Direct Tax Code proposes—but he has tried to move.
Lakhotia: Not in the basic exemption, but in the slab rate, FM has moved and that’s pretty good. It gives a chance that yes we can expect in the DTC the tax regime of Rs 10 lakh income and 10% tax only because this time the tax slabs have been changed. They are pretty good and very ideal one for the individuals having Rs 10 lakh or so. They are going to be happy. They will be able to fight the inflation as they are facing today.
Q: Did you expect even this much from him? Were you surprised?
Lakhotia: Not surprised at all because what I expected was for the common man initial exemption limit of Rs 30,000 coupled with standard deduction for salaried employed. Salaried employed the standard deduction is completely missing in this Budget.

Q: When we were talking before the Budget, you were hopeful that while the DTC does hang on our head from next year and that might not allow the Minister to tinker around too much—are you disappointed that from an investment category point there hasn’t been an expansion of the 80 C window at all?
Sinha: Yes one would have expected because as we were discussing that the tax slabs have been tweaked and this tweaking has been to make it come a bit closer to what the DTC proposes to do. One would have expected that the same philosophy would have extended to the tax benefits that you have under the exempt-exempt and then tax category that the DTC proposes. So on that count one is little disappointed.
But if you look at the larger picture, the fact that there is larger disposable income in the hands of people who are probably in the upper income bracket, there could be a possibility of that larger income now getting directed to savings if it’s not getting consumed.
Q: Are you okay with the fact that the category of people who are going to be getting this Rs 50,000 in their wallet are likely to come and invest in financial products?
Sinha: If you look at it from one perspective, this category of income generators may not be very large savers. But the FM has is not entirely left them out of the ambit of whatever he could do because the FM has a provision of putting about Rs 1,000 into accounts by way of the New Pension Scheme for the unorganised sector. So to some extent the FM has tried to cover and there the number of people that he proposes to cover is fairly large.
Q: But that’s not taken off—the New Pension System (NPS) has been a total disaster?
Sinha: Absolutely. In fact that’s why if there is an incentive that is provided by the government by incentivising people to start by making a contribution on the behalf of the pension saver.
Q: But Rs 1,000 a year?
Sinha: In the absence of zero, I would say this is better and given the fact that the NPS right now has only few thousand accounts. The amount that has been allocated for this scheme is about Rs 100 crore, which can potentially open 1 million pension savings accounts. I think that’s a positive sign.
Q: One statement of the FM, which has come in only recently in an interview to Network18, where the Finance Minister has said that issues concerning exempt-exempt-tax (EET), which is a big issue, that the exempt-exempt-exempt (EEE) category may go an be replaced by EET. He is re-looking at that, he is taking in the suggestions of the industry. He is just said a while ago. Is that something that heartens you because otherwise from next year onwards we are perhaps now on the path to moving to a DTC regime, which actually says that the only benefits you are going to get is on long-term pension products?
Goyal: Absolutely and if you look at it logically—for a common man who is investing about Rs 20,000-25,000 a year and he moves to an EET regime where even the premium, which he is been paid each year is not getting deducted, then the entire life savings actually becomes meaningless so that is extremely useful.
Q: Like Sanjay are you disappointed that he has not expanded the 80 C window and you get nothing out of the infrastructure bond because that’s probably going to end-up banks issuing it?
Goyal: Not at all. In fact, I would say that the limit of 80 C of Rs 1 lakh—if we see it as Mr Lakhotia was saying from a common man’s perspective—I do not think a person who is earning Rs 25,000 a month can actually exhaust the limit of Rs 1 lakh. So if he had expanded the limit under 80 C then the benefit would have again gone to the people who are Rs 5 or 8 lakh income bracket in a year. I am not at all disappointed and even on the infrastructure side, my feeling is that for a life insurance companies and mutual funds, we would actually be allowed to float funds, which would invest in those bonds.
Otherwise it will be very difficult for the government to take these bonds to the common man if the life insurance and the mutual fund industry don’t take this in a big way.
Q: So are you saying this time round these infrastructure bonds will not be issued only by financial institutions and banks like in the earlier days?
Goyal: I am saying they will still do the issuance. What we can do is we can float a fund, which will exclusively invest in those instruments.
Q: Have you had talks with the government towards this because he has been quite silent on this?
Goyal: No, we haven’t actually but my feeling is I see no reason why he shouldn’t allow this because we will still be investing in the bonds issued by those entities. The idea is can we take it public?
Q: The idea is will I get the tax benefit if I go through you instead of buying the bonds?
Goyal: My feeling is they should and then we can take this as a very big development next year. I am sure if I look it from a life insurance industry, we can definitely generate close to about Rs 5,000 crore on the infrastructure if he allows life insurance companies to float funds for this purpose.
Q: Do you fear that if this doesn’t happen what Kamesh is saying that we normally are in any case a very risk averse society? Do you fear that I would rather much go and put my Rs 20,000 there and make up that Rs 1 lakh with other incentives that are thrown into it like home loan, education of my children, my standard provident fund deduction rather than going and taking advantage of a mutual fund or of a unit linked insurance policies (ULIP)?
Sinha: We will also have to see what sort of coupon those bonds will have. What sort of lock-in will they necessarily impose—whether that is acceptable to me as an investor—would also be some of the considerations that you would have. Even today you have options within that 80 C, where you have instruments, which do not give you a very attractive rate of return but then there is certain amount of security with them. For example even banks deposits give you section 80 C benefits but why doesn’t all the investments flow into that category. I guess there is a healthy appetite for a trade-off between risk and return.
Ruchira Jalandhar, Jalandhar: Impact on tax slabs for women and senior citizens?
Lakhotia: This time round there is no special mention and that’s the reason that throughout India we have been receiving lot of calls—people are thinking that the Finance Minister has made Rs 160,000 for everyone. But I would like to give the happy news to the viewers that on the explanatory memorandum of the Finance Minister—Page 2 clearly speaks about the new income tax rates as are applicable for individuals, the women taxpayers and the senior citizens. It clearly states—talking about the women taxpayers—Rs 190,000 nil income tax, income between Rs 1,90,001 to Rs 500,000 at 10% and Rs 500,000 to Rs 800,000 at 20% and over Rs 800,000 at 30%. Similarly, happy news for the senior citizens—Rs 240,000 at nil, Rs 240,001 upto Rs 500,000 at 10% and Rs 500,000 to Rs 800,000 at 20% over Rs 800,000 at 30%.
The only big problem, which I feel in the senior citizen point, is age limit continues to be 65 years. I am going to retire 60 years—I get deduction from the airlines when I am 60, railways I get the deduction at 60 but income tax—why 65. This the question people are asking, “Why the age limit is 65?”
Nitin Mittal, Mumbai: Tax liability for Rs 6 lakh taxable income and exemption available under Section 80C?
Lakhotia: Definitely it will undergo changes but the fact is that he has not kept it in cold storage. I feel it will see the light of the day and I am very much optimistic that from 1 April, 2011 it will be implemented but people expect a little more with regard to the clear-cut roadmap of EET and other things.
Talking about the query which we have got of the viewer here from Rs 6 lakh income, Rs 120,000 putting under Section 80 C and the new Section 80 CCF, I would like to tell the views both are two different Sections, one cannot take advantage in the old Section 80 C itself so Rs 120,000 goes away and the balance amount remains Rs 480,000.
On this Rs 480,000 if he has got housing loan interest also that will continue to get him deduction and on the balance amount now he will be paying income tax, flat rate 10% only because the income up to Rs 500,000 now is 10% tax only.
Narayan Singh, Udaipur: ULIPs will become cheaper?
Goyal: This should make a big impact. I personal feeling is that if we look at ULIP for a ten year term or more this could actually increase the income from a customer’s perspective by close to about 1% each year. So this benefit and along with the new changes with the regulator had brought in from 1 January will make ULIPs much more attractive from a customer’s perspective.
Q: I want you to explain the infrastructure bond deduction a bit more -- it’s a deduction, right?
Lakhotia: It is not a rebate; it has no connection with the present limit of Rs 100,000. This means if I invest the entire Rs 120,000 in the new infrastructure bond I am not going to get the deduction. This is a new Section 80 CCF wherein it is provided that Rs 20,000 exclusively de-marketed for this one single item only.
Q: You mean deduction?
Lakhotia: Deduction mean deducted from my gross income.
Q: Quite like currently I do for my health investment up to Rs 15,000?
Lakhotia: Yes, Rs 15,000 plus Rs 100,000 80 C insurance etc same way this Rs 20,000 plain deducted from the income.
Q: We have been seeing that Finance Ministers over the years are abandoning their role as being financial planner. What has he done? He has basically said, “I am giving you more money. You go decide and figure out how you want to invest it. I am not going to give you more benefit under 80 C and therefore decide for you where you should really be investing and the choice is really yours as to how you want to put this Rs 50,000 (for above 500,000) to good use.” Do you think that’s the essence of what he has announced today, “I am giving you money. I am not going to decide for you where you invest” We always been arguing that your investments should not be driven by purely tax saving.
Sinha: Absolutely because if you look at historically many people have created their savings pool in the manner in which the tax benefit was provided at the point of saving. They did not pay attention on the fact as to whether this savings pool was going to meet their financial goals. I think we are now moving more to environment where we should save the way we ought to and not the way where we get more and more tax benefits. So that’s way it’s a healthy thing that the finance ministers are choosing not to be financial planners for the entire nation.
Q: Is your only fear though that people should not go and blow-up this Rs 50,000 that they get, they would rather invest?
Sinha: I would say there would be transitional benefit of that also because even if they go and spend this there will be a multiplier effect of the economy and while as mutual fund we would like to get the larger share of every pie that the saver would have but the larger growth will happen if the markets are stable and they are moving upwards, which would be a function of how the economy grow. So therefore if they go and blow-up the entire Rs 26,500 crore of tax benefit it has a multiplier which should take the markets up and we should be happy for that too.
Q: Not so happy -- probably wanted more?
Lakhotia: The point is how I can be happy? Please remember, savings we have seen but what about the inflation? Due to the inflation out of this income tax saving of Rs 50,000, my household expenditure will be additional expenditure of Rs 30,000-40,000. THe amount available for savings will be pretty small. Petrol prices gone up now, so virtually no impact on the net saving, net take-home money surplus available for the investor to save.
Q: What you are saying is it looks nice Rs 50,000 on the face of it but given the current circumstances may not actually leave much on the table for the citizens?
Lakhotia: Correct.

[source]

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New Tax Slabs post Budget 2010

Budget 2010 has been out and there has been a change in the Income Tax Rates that one would pay in FY 2010-11. This post has a brief detail about the changes:

Income Tax Slab  for Financial Year 2010-11
Assessment Year 2011-12
Tax	Men	Women	Senior  Citizen
Rate	(In Rupees)	(In Rupees)	(In Rupees)
0.00%	Upto 1,60,000	Upto 1,90,000	Upto 2,40,000
10.00%	1,60,001 to 5,00,000	1,90,001 to 5,00,000	2,40,001 to 5,00,000
20.00%	5,00,001 to 8,00,000	5,00,001 to 8,00,000	5,00,001 to 8,00,000
30.00%	Above 8,00,000	Above 8,00,000	Above 8,00,000
1) Surcharge is Nil and 3% Cess will be charged on Above Tax
2) Age of Senior Citizen is 65 Years

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Section 80 C: A Tax Saving Tool (Part 1)

Section 80C is the refuge that all of us take to protect our hard earned money against the sword called TAXES. But it is important to know this section intoto to get the full benefits. Here is my humble attempt at this:

Section 80C offers you a deduction of upto Rs 1 Lakh from the total income for a year. This money needs to be spent/invested on the instruments mentioned under this section. Here are some of the instruments that can be used to garner this deduction. I'll list only the instruments with fixed returns in this post.

• Public Provident Fund (PPF): From Rs 500 to a maximum limit of Rs 70000 each year. This has a lock-in period of 15 years. The current returns from this instrument are 8% p.a. which is again tax-free.
• National Savings Certificate (NSC): From Rs 500 to any amount. Only Rs 100000 is considered for Tax exemprion though. It provides 8% p.a. with a lock-in of 6 years. The point to be considered here is that the returns are taxable and the after tax returns are approx 5.53%.
• Employee Provident Fund: Your contribution as well as your employers contribution to your EPF are also considered under section 80C. You can withdraw money after 5 years but only under certain defined conditions. The returns are 8.5 % p.a. tax free.
• Life Insurance - Endowment Plan: Endowment plans give you a life cover as well a fixed amount on maturity. Premiums are usually higher than the term plans. The returns vary from plan to plan and are usually lower than other instruments listed above.
• Tax Saving Bank FD: The minimum investment is Rs 100 and varies from bank to bank. There is a lock-in period of 5 years. Returns are usually 6% to 8% p.a.

Wait for the next post where I'll talk about the market linked products.

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Tax Rates for FY 2009-10

It's that time of the year once again. Everyone must be wondering what is their tax liability and be scampering to save money from being taxed. Let us start by knowing which tax bracket do we fall in for this year:

Here is a pictorial presentation of the different tax brackets [courtesy: Outlook Money]:

How to arrive at Taxable Income?

Taxable Income = Income from (Salary + House Property + Capital Gains + Business/Profession + Other Sources) - Deductions under (Section 80 C + Section 80 D)

My next post will be about the various tax saving investments under section 80 C.

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Dividend Delusion

An article from Valueresearchonline.com today: One of the most persistent confusions that mutual fund investors have is with the concept of dividends. Many fund investors seem to think that a mutual fund dividend is some sort of a bonanza, an extra bit of money that comes their way because of something special the fund has done. This is not a fringe belief, yet it is so pervasive that giving out dividends has long been a standard method of attracting new investments among fund companies. I have been told by senior sales people of more than one fund company that they even work out thumb rules to figure out how much dividend payout will bring in what amount of fresh investments under which conditions.

This propensity to choose funds based on their dividend payments is a major problem. It is a completely spurious factor with absolutely no merit in it. The only reason why this belief persists can well be that investors do not understand the arithmetic of mutual fund dividends and confuse them with corporate dividends. A mutual fund dividend is basically redemption of your investments in a fund. It (redemption) just happens to be called a dividend. To pay this dividend, the management simply sells off a part of the assets held in the dividend plan of a fund and pays off the proceeds as dividend.

Here's an example of the accounting. Let's say you own a thousand units in a fund with a net asset value (NAV) of Rs 30. Your investment is worth Rs 30,000. The fund declares a dividend of 10 per cent. That's 10 per cent of the Rs 10 face value of each unit. Thus, the dividend is Re 1 per unit. Since you own a thousand units, your total dividend amount comes to Rs 1,000. However, this money will simply be deducted from the residual value of your investment. To pay the dividend, the fund will sell off an appropriate proportion of its assets. When the dividend is paid out, the NAV of the fund will drop by Re 1 to Rs 29. The end result is that when you receive Rs 1000 as dividend, the value of your investment goes down from Rs 30,000 to Rs 29,000. Dividends have no impact on the return you are getting from your investment.

Receiving dividends does have a tax implication. In equity mutual funds, dividends can play a role in tax planning since equity dividend income is tax free. If you invest in a fund and immediately get part of the investment back as dividend then you'll have a loss on your capital. However, one has to hold an investment for at least three months to qualify for a tax set-off with that loss.

The most important thing is the basic non-dividend nature of mutual funds' dividend and that's something that investors must understand. Perhaps the problem is in the nomenclature. Till a few years back, new fund launches were called initial public offerings (IPOs). Then the Securities and Exchange Board of India (SEBI) forbade the use of that term because it led investors to mistakenly believe that new fund launches shared some of the characteristics of new stock offers. Now, new fund offers are called just that - NFOs.

While a similar renaming is unlikely in the case of dividends, knowledgeable investors should stop themselves from choosing funds on the basis of payouts.

[source]

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Income Tax Rates for FY 2008-09 in India

Here are the rates at which one will be taxed this year on the basis of their income.

Taxable income slab	Tax Rate (%)
Men
Up to 1,50,000	NIL
1,50,001 - 3,00,000	10
3,00,001 - 5,00,000	20
5,000,001 upwards	30*
Women
Up to 1,80,000	NIL
1,80,001 - 3,00,000	10
3,00,001 - 5,00,000	20
5,000,001 upwards	30*
Senior Citizen (65 Years or above)
Up to 2,25,000	NIL
2,25,001 - 3,00,000	10
3,00,001 - 5,00,000	20
5,000,001 upwards	30*

*A surcharge of 10 per cent of the total tax liability is applicable where the total income exceeds Rs 1,000,000.

Note:

• Education cess is applicable @ 3 per cent on income tax, inclusive of surcharge if there is any.
• A marginal relief may be provided to ensure that the additional IT payable, including surcharge, on excess of income over Rs 1,000,000 is limited to an amount by which the income is more than this mentioned amount.
• Agricultural income is exempted from income-tax.

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Taxing Salaried masses more????

Salaried people now pay income-tax on their gross income while businessmen, self-employed persons and others pay tax on their net income, even as the income-tax exemption limit is the same for everyone. This gross injustice needs to be removed.

As per Income-Tax Act of 1961, income-tax is levied on net and not gross income. Salaried people were allowed to deduct expenses incidental to their employment viz conveyance, books and periodicals, newspapers, etc, from their gross salary since Indian income-tax Act 1922 u/s 7(2). Then, the limit for such expenses was Rs 500 and the same was adopted verbatim in the Income-Tax Act 1961 u/s 16(i). With inflation, the limit for deduction u/s 16(i) rose from time to time.

In the Lok Sabha debate on Budget 1974, then finance minister YV Chavan made it "standard deduction" on the grounds of inevitability of such incidental expenses and it was decided that documentary evidence for such expenses would no more be needed to claim benefit of "Standard deduction".

Till the assessment year 2005, the limit for such expenses was steadily raised up to Rs 30,000 or 40% of gross salary whichever was less. In the budget for assessment year 2006-07, finance minister P Chidambaram disallowed the standard deduction for salaried people on the grounds of raising the exemption limit to Rs 1,00,000 as well as on broadening of slabs of income-tax. The same budget could not be debated due to boycott by BJP, and salaried people became the victim of politics.

In fact, the former chief justice of India, Justice PN Bhagawati, has rightly mentioned in his book on income-tax that exemption and deduction are distinguished; so on mere increase of the tax exemption limit, the right of deduction cannot be taken away.

Due to hike in petroleum prices a substantial portion of salary is spent on conveyance. The Rs 800 conveyance allowance that is exempted from tax hardly takes this into account. Expenses on books, periodicals, newspapers also ought to be deducted while taxing the income of salaried people, as is allowed while levying tax on other assessees under other heads of income viz house property, business profession, capital gain, other sources of income. This provision is also available in other countries viz USA, France, England, Switzerland, etc.

On November 6, 2006, a member of the Central Board of Direct Taxes also accepted the anomaly and proposed reinduction of standard deduction from 2007. This was reported in several leading newspapers.

Due to the ignorance of masses and politicians, and the wholly unjustifiable process of passing the Budget without any discussion in Parliament, after a closed budget-making process even in this era of transparency, salaried people are condemned to pay tax on gross receipts while other assesses are paying their tax after deducting from their gross income several incidental expenses as a matter of right.

It is the height of injustice that more than 2.7-crore salaried people are paying tax on their gross incomes while others, whose incomes arise from sources other than salary, pay tax on their net incomes.

(The author teaches at Govt Post Graduate College, Noida)

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Source: ET

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