Budget 2024: Expectations for tax sops under old regime run high

While lower tax rates may marginally alleviate some burden on taxpayers, the focus should be on providing adequate deductions that encourage investments, experts said. (Image: Pixabay)
While lower tax rates may marginally alleviate some burden on taxpayers, the focus should be on providing adequate deductions that encourage investments, experts said. (Image: Pixabay)

Summary

  • Tax experts say tax sops such as standard deduction, deduction limits under section 80C, need to be relooked in light of inflation

The finance ministry introduced a new tax regime in the financial year 2020-21 with lower tax rates in exchange for most major tax deductions and exemptions available under the old regime. 

Over the years, various changes have been made to the new regime to enhance its appeal, including tax rebates for incomes up to 7 lakh, wider tax slabs, and lower surcharges for the super rich. 

However, the last three budgets have not seen any new benefits or deductions under the old regime to reduce taxpayers' net tax liability or provide additional incentives for investments or certain expenses. 

It is clear that the government aims to encourage taxpayers to switch to the simpler new tax system. However, many taxpayers are not yet ready to make the transition. With the upcoming Budget due in July, expectations are high among stakeholders that the old regime could see increased deduction limits on standard deductions, Section 80C, housing loans, and health expenses, among other things, in line with inflation. 

“The tax structure should encourage deductions for investments rather than promoting an alternate tax regime for individuals without such deductions as seen under the new tax regime," said Neeraj Agarwala, Partner, Nangia Andersen India. 

“While lower tax rates may marginally alleviate some burden on taxpayers, the focus should be on providing adequate deductions that encourage investments and do not feel penalising. This approach would not only foster a culture of saving and investing but also ensure that individuals feel supported in their financial planning," he added.

Mint spoke to experts to understand their expectations from the Budget on the personal tax front.

Standard deduction, 80C in sync with inflation

The Section 80C limit was last increased in 2014 from 1 lakh to 1.5 lakh. About 19 investments and expenditures, including provident fund, tax-saving mutual funds, insurance premiums, and children's tuition fees, are clubbed under the overall 1.5 lakh limit of 80C.

“The 80C limit needs to be revised as it has remained unchanged since 2014 despite rising inflation rates," said Archit Gupta, founder and CEO, Cleartax. “Such a revision would not only help taxpayers combat inflation but also stimulate savings and investments in key financial instruments like ELSS, tax saver FDs, PPF etc."

Also Read: How Section 80C of IT Act has fallen out of sync with inflation

Experts also suggest that the 50,000 standard deduction limit and the tax exemption limit need to be revised. 

“With the rise in the cost of living, the basic slab which is not subject to tax must be increased and linked to inflation. This has particularly hit the private sector employees hard as their compensation is not linked to inflation but decided by market forces," said Kumarmanglam Vijay, partner, JSA Advocates and Solicitors.

Vijay added that expenses like children’s education fee should get separate relief. “The cost of children’s education now forms a significant portion of a general household. Clubbing the same with the investment limit prescribed under section 80C does not provide any adequate relief to the employee," he said.

Tax support for homebuyers

Section 24 allows a maximum deduction of 2 lakh per year on interest paid towards a housing loan. Pranjal Bansal, partner A A P T & Associates, chartered accountants, said the government should consider increasing this limit so that middle-class families striving for home ownership can fulfil their dream.  

“The interest component of housing loans represents a substantial financial burden for many taxpayers. Increasing the tax rebate on housing loan interest would not only alleviate financial pressure on borrowers but also encourage investment in the real estate sector, supporting the government's goal of housing for all," he said. 

The housing-for-all goal will get further impetus with the extension of the Pradhan Mantri Awas Yojana-Urban (PMAY-U) until 31 December, 2024, Gupta said. 

“This extension is aimed at completing the existing housing projects and supporting urban development​. Additionally, we expect enhancements or new introductions in tax benefits similar to Section 80EEA, which offers a deduction of Rs. 1.5 lakh on home loan interest aimed at affordable housing," he said.

However, this new section should have an enhanced limit in the value of the home loan and the property value. “Given the increase in housing costs, affordable housing no longer costs 45 lakh and this revision is inevitable to make homeownership more affordable and financially accessible," Gupta added.

Rationalisation of capital gains tax

Capital gains taxation is currently complex, given the different holding periods and tax rates across different assets. 

“These need rationalisation in the form of simplified indexation provisions, unified tax treatment for listed and unlisted securities and streamlined classification of debt and equity instruments. These changes could significantly reduce administrative complexity and encourage greater participation in the financial markets," said Bansal. 

Gupta said there’s a need for rationalisation of tax rates on ESOPs for startups. “Employee stock ownership plans currently face complex dual taxation. For instance, employees earning over 15 lakhs face a high tax burden on ESOPs under the new regime, paying a 30% tax on the value at exercise as a perquisite and potentially an additional 20% on long-term capital gains at sale, leading to effective tax rates of 40-50%," he said. 

“To encourage retention and reward risk, it's suggested that ESOPs held for over two years be taxed only at the time of sale. This would eliminate dual taxation and align the tax payment with the actual realization of gains," he added.

Lower tax rates

The general sentiment among taxpayers is that their net tax liability is quite high if they combine direct and indirect tax paid on different services. Experts expect the tax slabs to be widened to mitigate the impact. 

“Currently, the highest slab rate for individuals is 42.74%, applicable to those with taxable income above 5 crore. For individuals earning between 5,00,000 and Rs 10,00,000, the top slab rate is at 20.8%, and for those between 10 lakh and Rs 15 lakh bracket the top slab rate is 31.2%. With limited deductions, clearly the slab rates are on the higher side," said Agarwala. 

This forces individuals to resort to various techniques like house rent allowance or HRA claims in the name of parents and spouse, tax structuring of funds in offshore accounts, and tax harvesting to save tax, Agarwala added. 

Also Read: Modi 3.0: It's time to write a guidebook for tax reforms

“Though these may not be technically wrong, with a lower acceptable slab rate, individuals may be willing to pay taxes without looking for methods to save further taxes. A more straightforward and lower tax regime can change the perception of income tax from being penalizing to being contributory, fostering a more positive attitude towards tax payments."

Bansal concurred and said: “Revising the tax slabs to ensure a more progressive tax structure could make the system fairer and more equitable, ensuring that higher income groups contribute their fair share."

Relief for rising medical expenses

Given the rising healthcare costs, there is an expectation for an increase in the deduction limit for medical insurance premiums under section 80D. 

“Currently, the limit stands at 25,000 for individuals and 50,000 for senior citizens. It is anticipated that the budget may raise these limits to 50,000 for individuals and 75,000 for senior citizens, to support healthcare needs substantially. Additionally, extending the benefits of Section 80D to the new tax regime would not only promote equitable access to healthcare but also encourage wider adoption of health insurance," said Gupta.

Alternatively, it is expected that the government would reduce GST rates on medical insurance, among other key expenses. “A lower rate of GST on health insurance, term insurance, medical treatments, and senior care services, which is currently at 18%, may be considered as it adds a substantial amount to already high healthcare costs to an individual," said Vijay.

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