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Prudence peppered with populism

New Delhi, Feb. 21: The government plans to raise the floor for tax-free status from the current income level of Rs 50,000 to a level of Rs 70,000-Rs 80,000.

At the same time, it plans to retain the concept of standard deduction, which the Kelkar committee had wanted to scrap. In fact, there are efforts to raise it to Rs 30,000 from the current level of Rs 20,000, in case the base income level, from which personal income tax is levied, is pegged at Rs 70,000.

Sources said the decision on these two elements in the budget was taken at a meeting between Prime Minister Atal Bihari Vajpayee and finance minister Jaswant Singh last week. They decided that there should be a balancing act between the pragmatism of the Kelkar recommendations and the need to have a more populist budget given the fact that the BJP will be facing elections to nine state assemblies.

The Kelkar report had recommended two tax rates instead of the current three — 20 per cent at the lowest taxable income slab and 30 per cent on the higher slab. This is likely to be accepted.

But the committee’s recommendation that housing tax sops be curtailed is being dispensed with. Both the urban development ministry and the Planning Commission have strongly criticised the move while a rival committee set up by the BJP had attacked it. Housing sops, which allow mortgage interest up to Rs 1.5 lakh to be deductible for tax purposes, will consequently be retained.

There is also a move, strongly supported by BJP MPs, to allow various taxes and rates paid to state governments to be made deductible from rental income from houses when calculating personal income tax. However, the Central Board of Direct Taxes does not favour this as it feels it will further complicate calculations.

The Kelkar Committee’s move to abolish tax on dividend income in the hand of equity holders has been accepted as this is considered people-friendly and is expected to bring back large numbers of small investors into the market.

Tax sops for household savings in instruments like National Savings Certificates, post office deposits, and relief bonds, which the Kelkar committee had wished to see withdrawn, will remain but the amount allowed may be reduced from the current level of Rs 12,000.

Instead, the government will try to encourage savings in pension funds, a market segment that is being opened up to private players, by doubling the ceiling for savings under this head from a current Rs 10,000 to Rs 20,000.

Besides this, the budget will announce a pension plan for lower middle class and poorer segments of the population.

The government has been considering three alternate models for this model pension scheme which it will launch but will be managed by private pension fund managers.

The first will be a mandatory system paying out a minimum subsistence pension to all for which the state will make a substantial contribution. The second, also a mandatory one for the formal sector, works on the pay-as-you-go principle, and a third model, which has been accepted, is that of a non-mandatory pension scheme, covering both formal and informal sectors privately managed with cross subsidisation.

Most members of Vajpayee’s Cabinet have favoured the third model, which could work with low monthly contributions for those from the weaker sections of the society and have a tag on disability cover for those workers who remain absent because of a major illness or accident.

The final Kelkar committee recommendation that the lower income level for senior citizens and widows for tax purposes be Rs 50,000 higher than for normal citizens has been accepted as it is considered a politically welcome step. A Kelkar recommendation that tax rebates on medical expenses and educational expenses be dispensed with is also likely to be given short shrift.

In order to tailor the budget to be more supportive of senior citizens, the government is also likely to announce an interest income protection scheme which would allow senior citizens to maintain their current standard of living despite falling interest rates and rising inflation.

This is likely to be done through an inflation-linked interest income scheme to be unveiled with the budget, which would allow them to maintain their current standard of living, in spite of falling interest rates and rising inflation. This is likely to be done through an inflation-linked interest income scheme to be unveiled in the budget.

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