Yeh dil wants more tax reliefs

This Union Budget, individuals hope that Finance Minister Nirmala Sitharaman will continue with the tax cuts. With personal income tax zero for annual salaries up to INR12,00,000 (or INR12,75,000), and GST 2.0, people want more money in their pockets. There are three crucial and grey areas that have caught their attention. They relate to fixed deposits, ESOPs (employee stock options), and capital gains. Apart from simplification, and rationalisation, the tax changes in the three areas, feel experts, can boost savings, enhance stock and mutual fund investments, and remove anomalies. In essence, they will be carry-forward the letter and spirit of the new tax law.

Fixed Deposits (FDs), for instance, are taxed differently from capital gains, which result from the sale of stocks. At present, interest earned on FDs is taxed according to the slabs that an individual falls under, which is graded as per income levels, ie, higher the earnings, higher the tax. In comparison, the short-term capital gains tax is 12.5 per cent, and the long-term one 20 per cent, which may be lower, especially for the higher-earnings taxpayers. Experts feel that they need to be at par, even though FDs are saving instruments, and stocks, which attract capital gains, are for investments.

In addition, such a move will boost household savings. Bank deposits, as a percentage of overall household financial savings, dropped from nearer to 38 per cent in 2023-24 to just over 35 per cent in the next fiscal year. SBI Research, which urged the Government to make this change, asked for two additional ones. The first is to make the lock-in period for tax saving FDs the same as mutual funds, or three years. The second is to do away with the tax deducted at source for interest that is earned on deposits in the individuals’ savings accounts.

ESOPs is another story. At present, stock options are given by employers to enhance the morale of the employees, as well as retain the latter, and enable them to partake in the increases in future valuations due to the growth of the firms. Although such options were initially common among start-ups and tech firms, they have emerged as normal incentives. However, there are major lacunae in how ESOPs are taxed. In its Budget memorandum, the Bombay Chamber of Commerce and Industry claimed that ESOPs lead to double outflows of money for the employees.

Once the eligible employees exercise the choice to take stock options, they need to pay the “exercise price,” which is pre-determined by the employers. At the time of the allotment of the ESOPs, the employees need to immediately pay the taxes on them. It is calculated on the difference between the “exercise price,” and the market price. “In other words, this results in cash flow issues for employees as they are required to pay tax in the absence of any actual receipt of cash,” stated the memorandum. This is because tax becomes due even if the shares are not sold, and retained by the employees.

While the exercise itself causes financial strain, the tax liability increases the burden. This can, therefore, “dissuade employees from exercising their options, impacting morale and retention.” More crucially, the tax defeats the purpose of ESOPs, which is aimed to benefit the employees later, when (and if) valuations go up, and they can sell the shares at higher prices. In addition, this creates a difference between ESOPs (taxed immediately on allotment), short-term capital gains (taxed if sold within a period), and long-term capital gains (taxed if sold after the specified period). The fact remains that the three separate taxes deal with shares, but one is not sold, the second is sold soon, and third is sold later.

Capital gains, whose rationality remains intact, even the difference in the rate between short-term and long-term, has emerged as a contentious issue because of the zero tax on incomes up to INR12,00,000. As clarity crept in after the Budget announcement last year, while the personal tax was nil for the earnings due to refund of tax deducted at source, special taxes were applicable on it. The latter included capital gains, and others that fell outside the realm of ‘direct’ tax. Hence, those with multiple income sources need to pay taxes, even if their incomes are below INR12,00,000.

Experts contend that this creates confusion, and introduces complexity, rather than simplify the tax regime. Any annual income, whatever may be the sources, needed to be zero tax if the amount was INR12,00,000 and below. Most taxpayers, especially in the urban areas, have multiple sources of earnings and, apart from salaries, they do invest in stocks and mutual funds. The existing regime may dissuade them from investing in stocks. In addition, the INR12,00,000 limit is random and stocky. This is because if the income goes over `12,00,000 the individual cannot claim refund, or be liable for zero tax for that amount, and needs to pay normal taxes on the total.

If the Government claims that the new income tax law has simplified the regime, and made it easier for individuals to pay taxes, the above three issues tend to conflict with such a thought process. The idea needs to be that a person does not need to think much about her taxes, and how much she needs to pay. It should be easy to calculate the burden. However, the current rules related to ESOPs, FDs, and capital gains make it more difficult. Even educated taxpayers need to consult financial experts, and pay an extra amount for it.

Anyone who has tried to fill tax returns online, despite the claims that it is simple and logical, knows the difficulty levels. It takes too much time, several calculations, some computations, and still result in grey areas, which can only be resolved or clarified by an expert. Calculating taxes, and filing returns should not depend on advice, unless the incomes are complex. They should happen like a breeze. Even a semi-literate should be able to file them. This is a crucial area of concern as the Government wants to enhance ‘Digital India,’ and expect most people to transact online. Merely having a simple online form is not enough. What is important is that people can easily fill them without having doubts, or facing queries later. Or else, the citizens will easily lose confidence in the ruling regimes.