India Inc., is considering new tax laws from 2011. These would be “written from scratch” tax laws that change the current slab systems as well as few other deep rooted notions of taxation. Most of the proposed changes appear to be helping the individuals and the economy, except for one: taking out the benefit on interest paid on home loan (when the home is not rented.) This step severely impacts the housing market as well as the wealth planning of individuals. In the absence of appealing retirement plans, (like 401-k plans in US) people in India consider investment on home as a major component of their retirement plan. If someone gets a tax break for 1.5L every year over a period of 10 years, then that person is getting a decent tax break on 15 lakhs of rupees (close to 30K USD). That is a huge saving from a retirement planning standpoint. If the tax break is taken out, then it will discourage that sort of wealth planning.
BTW, I am looking forward to the new tax laws for the following reasons:
- Incremental tax percentages for higher slabs rather than applying the tax percentage for the entire income. For example, if you earn more than 5 lakhs today, your entire income is taxed at 30%. In future, only the amout higher than 10 lakhs will be charged at 30%.
- Ability to perpetually forward losses to future years. This will help investments in markets.