Ministry of Finance Proposes to Introduce Benefits for Paying Personal Income tax

Ministry of Finance Proposes to Introduce Benefits for Paying Personal Income tax


The Ministry of Finance has proposed the introduction of three new personal income tax exemptions, in particular, exemption from income tax for citizens who quit their jobs, as well as the removal of the age limit for the deduction for medical services rendered to incapacitated children.

According to RBC, these initiatives of the Ministry of Finance are in the draft of the Main directions of budget, tax and customs-tariff policy for 2023 and planning period of 2024 and 2025.

Department’s Proposition

It is proposed that severance pay, average monthly earnings for the period of an employment agreement and other payments provided for by law which are accrued to an employee on dismissal should be exempt from tax.

At the moment, payments which are accrued to an employee in the case of reduction or liquidation of an enterprise are not subject to tax at termination of employment. If an employee resigns, he or she will receive compensation for unused leave. Tax must also be paid on this amount. If a person is dismissed by agreement of the parties, he may be paid severance pay, if it is provided under the contract. The employer must pay personal income tax on this amount. There is an exception for severance pay. If the total amount does not exceed three times the average monthly wage, no tax is payable. For enterprises and organizations located in the Far North, the amount of tax-free severance pay is equal to six months' average earnings.

Tax Deduction

In addition, the Ministry of Finance has proposed extending the opportunities for a tax deduction for the amount spent on paying for medical treatment for incapacitated children. Now this benefit can only be taken advantage of until the child reaches the age of majority. Under the Tax Code, working Russians have the right to an annual tax deduction for expenses spent on their own treatment, treatment of their spouse, parents and minor children. It does not matter whether the child is disabled or incapacitated. Once the child turns 18, this benefit is no longer available to parents. An exception is made for disabled children of groups 1 and 2, who are enrolled in full-time residential educational institutions. Parents in this case are entitled to a deduction until the execution of children's age 24. At the same time, the Ministry of Finance has proposed to give parents the right to reimburse the costs of medical treatment for children who have been declared legally incompetent by a court. In this case, the age of the children does not matter.

The biggest deduction can be obtained from the amount which is limited to 120,000 rubles ($2,248.92.) It turns out that a maximum of 15,600 rubles ($292.36) can be returned, which is 13% of the tax paid. Meanwhile, it is explained that if the treatment is expensive, the deduction can be obtained without regard to this limit.

Regions may Reduce tax in Real Estate Transactions

The Ministry of Finance proposes to give regions the right to reduce the minimum period of a citizen's ownership of real estate in order to qualify for exemption from personal income tax on transactions.

Under the current laws, citizens are exempt from sales tax when the minimum period of ownership expires. In the case of donation of housing by close relatives, the period is set at three years. 5 years when real estate is donated by other persons.

What will be Effect of Introduction of These Benefits?

According to RBC, citing the opinion of Doctor of Economics, Professor of the Financial University under the Government of the Russian Federation Alexander Safonov, the effect of personal income tax benefits may be “zero” for those Russians who have a low income. Safonov underlined that many families themselves use housing inherited from relatives or offer it for rent to others to have some income, but do not sell their property. Regarding the treatment of children with disabilities, he said that few parents can take advantage of paid medical treatment, for which the tax deduction is extended.

Personal income tax exemptions reduce revenues to regional budgets. According to Safonov, that is why not all subjects of the Russian Federation will agree to reduce the period of property ownership, so that citizens could get this benefit in a transaction.

According to RBC, Lyudmila Kruglova, Head of the structural and tax consulting practice at Lemchik, Krupsky & Partners, argues that compensation for vacation that was not taken by an employee is essentially a “deferred payment.” According to the law a person who is dismissed has the right to choose: to take a vacation or receive monetary compensation for it.

That is why, according to Kruglova, vacation compensation upon termination of employment should also be taxable. At the same time, the exemption from taxation of monetary compensation for vacation may cause abuses in enterprises and institutions. Employees, especially those who are among the top managers, according to Kruglova, may be “fired” for vacation, while receiving tax-exempt compensation, and then they will be hired again. That is why experts are almost unanimous that citizens with low incomes will not have the proper effect of the proposed measures.

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