Budget Expectations: Time to revise tax slabs and deduction limits for personal tax payers

• Increase basic exemption and deduction limits under various sections
  
• Make more deductions available under the simplified tax regime
  
• Rationalize capital gains taxes across asset classes and streamline holding period

It is that time of the year again. Finance minister Nirmala Sitharaman is all set to deliver the budget on February 1. Like every year, expectations are high that she will come as a messiah for the common taxpayer and deliver a bag of goodies just like Santa Claus.

There have been a lot of expectations from the taxpayers because the last significant change that happened for the taxpayer was in 2020 when the simplified tax regime was introduced.

“Most of the deductions like 80C, 80D, HRA, and so on have been standard for quite some time. The reason why the taxpayers are hoping that these will be increased is that there has not been any change in the last several years. However, the cost of goods has gone up, the medical premiums are exorbitant and these have now become a big leak from the savings of the common taxpayer, so it is necessary that there is some kind of relief,” says Aarti Raote, Partner Deloitte India.

Here are some key expectations taxpayers have from Budget 2023.

Revision of tax slabs and increase in deduction limit

“The basic exemption limit has been set to ₹2.5 lakh for almost eight years, now it is high time it should be increased to ₹3-3.5 lakh,” says Archit Gupta, founder and CEO, Clear.

There are expectations to increase deduction limits under some of the key sections too. “One of the major expectations of the salaried class taxpayer is to increase the limit of deduction under Section 80C from ₹1,50,000 to ₹2,50,000,” says Akhil Chandana, Partner, Grant Thornton Bharat.

Currently, the deduction allowed under section 80C covers a wide range of eligible investments/expenses such as payment of life insurance premium, employee’s contribution to Provident Fund, Public Provident Fund (PPF), National Pension Scheme (NPS), housing loan principal repayment, Equity linked saving schemes (ELSS), etc.

“The increase in deduction limit will achieve the dual objective of encouraging savings and reducing tax burden,” says Chandana.

Further, the present limit under Section 80D has been set at ₹25,000 per financial year for self (below the age of 60 years), spouse and dependent children in respect of payment of health insurance premium. Further, separate deduction is available for parent’s health insurance up to ₹25,000 (₹50,000 if parents are aged 60 years or above) or medical expenses (in case of no health insurance).

“Post the Covid situation and ever-increasing medical cost, it is the need of the hour to relook into these provisions and increase the 80D limits so that the individuals have adequate financial cover under their health insurance plan,” Chandana adds.

Making more deductions available under the simplified tax regime

The simplified tax regime has also not provided a clear advantage to the taxpayer. “The taxpayers do claim a lot of deductions and exemptions which at times outweigh the reduction in the tax slabs under the new tax regime. This is evident from the fact that only less than 10% of people opt for a simplified tax regime,” says Raote. In fact, the Government has analyzed the reason why the new tax regime is not popular and what can be done to increase adoption.

Today, the simplified tax regime has only a few deductions available. Standard deduction is not permitted under the simplified tax regime. Raote says that giving it under the simplified tax regime will be beneficial for everybody as there is no proof required to be submitted for this. Similarly, everybody does a contribution to the provident fund and it requires no evidence because it is an employer-based deduction evident from Form 16, and bringing it under the new tax regime will benefit everybody.

Agrees Suneel Dasari, Founder and CEO @EZTax.in, “One can expect the new tax regime to be enhanced with more favourable tax slabs to pave the way for the sunset of the old tax regime and reduce compliance complexity.”

Rationalization of capital gains tax rates

Presently, long-term capital gains (other than listed shares and units of equity-oriented funds) attract a tax rate of 10%. The long-term capital gains on the sale of other assets attract a tax rate of 20%. Further, short-term capital gains the on sale of listed shares attract a tax rate of 15% and short-term capital gain attracts the tax rate as per the applicable slab.

Today the awareness and inclination to invest in the stock markets have increased. “However, you have tax provisions that give you different kinds of tax implications on whether the shares are listed, or not listed, the holding period and tax rates also differ for listed and unlisted shares. All this creates a kind of confusion for the taxpayer.“ It is recommended that the different tax rates are harmonized to simplify the overall tax mechanics.

A uniform holding period should be specified to treat a capital asset as short-term or long-term in nature,” says Chandana. He also says that the present limit for long-term capital gain exemption of ₹1 lakh on the sale of listed shares or units of equity-oriented mutual funds (on which STT is applicable) should be increased to boost investments in the capital market.

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