New Cess to Work From Home Deduction: What common man may expect from Budget 2021

Budget 2021 expectations for the common man: The Finance Minister will present the Union Budget 2021 on February 1, 2021 in the backdrop of the pandemic and the chaos it has caused in the lives of the citizens of the country, In the past year, Indians (as also others around the world) have faced job/salary cuts, increased cost due to inflation and challenges of adapting to the new normal. The expectations from Budget 2021 are thus higher than the previous Union Budgets with a hope of further tax cuts and relief from the pandemic induced burden.

Whatever be the wish list, given the fiscal situation that the country finds itself in, it is unlikely that major changes will be made to the tax laws, however, some changes that are still on the list of “maybes and we hope” are set out below:

Increase in health and education cess or introduction of COVID-19 Cess

The focus of the government is to ensure that vaccination reaches all the citizens of the country and they also endeavour to improve the overall healthcare infrastructure of the country. In order to garner revenue for increased spending in these areas, it is expected that the government may increase the health and education cess from the existing 4% or introduce a new COVID-19 cess to combat COVID-19 and its fall-out. The cess may be introduced for taxpayers in the highest tax bracket. While this is contrary to the expectation of taxpayers on tax relief, it is also perhaps something that is the need of the hour for the government to continue the good work on managing the pandemic.

Interest on home loan

The Finance (No 2) Act, 2019 had introduced a new provision which allowed a deduction of interest paid on loans taken to buy a residential house whose stamp value did not exceed forty-five lakhs and the taxpayer did not own any other house as on the date of the sanctioning of the loan. The deduction is restricted to Rs 150,000 and subject to other conditions. In order to be eligible for deduction, the loan has to be taken prior to 31 March 2021. It is expected that the period for taking the loan may be extended by at least 1 year (ie., to March 31, 2022) as the past year saw a drop-in spending by taxpayers.

Tax relief on spending

LTC Cash Voucher Scheme

The government had introduced the LTC Cash Voucher Scheme to provide tax relief to taxpayers who bought goods or availed services, which are subject to GST at a rate of 12% or more, during the period 12 October 2020 to 31 March 2021, in-lieu of availing exemption on travel cost while on leave. The exemption is provided subject to certain conditions with a maximum exemption of Rs 36,000 per person. The proposal served the twin purpose of boosting demand in the economy as well as providing tax relief to the taxpayers.

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There is a request that the government formalize the LTC Cash Voucher Scheme by making suitable amendments in the tax laws, which shall enable private sector employers to adopt the scheme with more clarity and confidence. Further, it is also expected that the government may extend the LTC Voucher Scheme by one more year (ie., upto 31 March 2022).

Work from home expenses

Work from home has become a new normal for everyone today. It is expected that the government may provide some relief to taxpayers to compensate for the higher cost incurred while working from home; perhaps some deductions for expenses like electricity etc or some kind of fixed deduction.

Medical insurance/ expenditure

While India has combated the pandemic with great resilience, the flip side is that medicare cost in the country has sky-rocketed and the tax laws do not provide any significant tax break on such costs. Depending on various factors, the deduction presently available could range between INR 25,000 to INR 100,000 per annum. Given the focus on healthcare and allied sectors, it is expected that the government may liberalise the existing tax provisions to include all medical expenditure as a deduction for all taxpayers as well as increase the limits for insurance premium which are eligible for deductions.

Clarity on residency for individuals stranded in India

The Central Board of Direct Taxes was proactive in issuing clarifications, for determination of residential status, on exclusion of days spent in India by taxpayers who were on a visit but stranded due to the India wide lockdown. The clarification was however issued only for the fiscal year 2019-20 with expectations that some notifications would be issued for the fiscal year 2020-21 as well. It is expected that the Finance Minister may make legislative amendments for the fiscal year 2020-21 – this is much waited for and will be a welcome relief to stranded taxpayers, as international flights are still not fully functional. We must remember that tax residency is dependent upon physical stay (in most cases) and it is residency that determines taxable income.

The FM has hinted that Budget 2021 shall be unlike any other presented in the country as this one is post a pandemic- the focus will be on growth and building of our economy and perhaps expectation of cuts and sops is really being over ambitious While wish lists go out year after year, the budget day does have some rabbits pulled out of the hat – Let’s see what we have in store this year, so stay tuned for more on February 1.

(BY Surabhi Marwah, Partner – People Advisory Services and Co-Leader – Private Client Services, EY India. Aditya Modani, senior tax professional with EY has also contributed to this article. The views expressed are personal.)