With Finance Minister Nirmala Sitharaman set to present Budget 2024-25, the expectations from her on the personal tax front are many. Some of the major ones that individual taxpayers have are:
Realignment of income slabs/tax rates: Since 2020, individual taxpayers have an option to choose between old and new tax regimes every year. The old tax regime provides for various exemptions/deductions which need to be foregone in case one opts for the new tax regime. The slab rates for the old regime have not been revisited since past many years while the basic exemption limit was enhanced to ₹3 lakh under the new tax regime in the 2023 Budget.
If the stated intent of the government is to implement the new tax regime only, then to enhance the net disposable income, they may consider enhancing the basic exemption limit under the said regime to ₹5 lakh. The other slab rates can be adjusted basis the revised limits in line with the progressive tax rate system India has always adopted.
Increase in limit for deduction under Section 80C: Section 80C deduction is capped at ₹1.50 lakh and the same has not been revised since first Budget presented by this government in 2014. With rising inflation, the government could consider increasing the said ceiling to ₹3 lakh. This will not only help channelise individual savings into productive assets like equity/housing, etc., but also help reduce the tax burden.
Hike in deduction towards health insurance under Section 80D: With medical costs spiralling, there is a need to increase the current deduction towards health insurance which ranges from ₹25,000 to ₹1 lakh (depending on the family member for whom the insurance is taken and his/her age) to ₹50,000 to ₹1.5 lakh.
Increase in standard deduction: Standard deduction was re-introduced in the 2018 Budget in lieu of transport allowance and miscellaneous medical expenses. The current limit for standard deduction under both new and old tax regime is ₹50,000. Considering the ever-increasing cost of living, it would be prudent to consider an enhanced limit of ₹1 lakh for the said deduction.
Enhancement of benefits for home buyers: With increasing real estate prices, expansion of tax breaks and incentives for home buyers would aid in enhancing common man’s ability to purchase housing. Presently, interest on borrowed capital for acquiring or constructing a house property (self-occupied) is deductible up to ₹2 lakh subject to satisfaction of prescribed conditions. This deduction may be increased to ₹3 lakh at least.
This incentive would encourage potential home buyers to consider investing in affordable housing. Also, the principal amount repaid towards a home loan is deductible under Section 80C and capped within the overall limit of ₹1.5 lakh. This being a critical investment, could be carved out of the 80C limit and can be allowed as an additional deduction up to ₹1 lakh which will not only aid home loan borrowers but will also boost investment and encourage demand.
Simplified capital gains tax regime: The government may look at simplifying the existing capital gains tax regime due to its complexity around different holding periods and tax rates across different category of assets. For example, the period of holding for debt instruments is 36 months, for immovable property it is 24 months whereas for listed equity shares/equity-oriented mutual funds it is only 12 months.
Also, currently the base rate for taxation of long-term capital gains from listed equity shares/equity-oriented mutual funds is 10 per cent (on gains exceeding ₹1 lakh), while other gains are taxed at 20 per cent, depending on the nature of the asset.
Most of the expectations outlined above can boost consumption in the economy by leaving more net disposable income in the hands of the taxpayer. However, the government would also need to find alternative sources of revenue to compensate for tax collections foregone on account of the above. Particularly so, in the context of India’s commitment to maintain fiscal prudence.
The writer is National Leader, Global Mobility Services – Tax, KPMG in India