As we move closer to February 1, we see wish lists from different factions of the society. Amid the expectations from various industry bodies, investor groups and businesses, there is also the voice of the salaried class who place their hopes on the Union Minister of Finance for tax reliefs and rate cuts.
The last couple of years have been extremely harsh on the taxpayers on account of pay cuts, lay-offs and inflation, coupled with added medical expenditure. Hence, similar to every year, the taxpayer is hopeful that this year’s Union Budget would provide him/her with some much-needed tax cuts.
SOME COMMON EXPECTATIONS
A] Relief in taxes
The personal income tax slabs and rates have remained unchanged since 2017-18. The only change that was introduced was the ‘Simplified Tax Regime’ that provided an alternative of reduced tax rates at the cost of some deductions and exemptions enjoyed by salaried individuals.
The finance minister had indicated that the Simplified Tax Regime would save taxpayers on an average of Rs. 78,000 when compared with the regular tax regime. However, this did not take into account the tax-saving exemptions and deductions on house rent allowance (HRA), leave travel allowance (LTA), and housing interest that most taxpayers enjoy. Thus, it was no surprise that the new regime had very few takers in the last two years.
It is expected that this year, the government would extend a clear tax reduction and make a change in the tax rate for a simplified tax regime that would help improve cash flows for taxpayers.
Some suggestions around this include increasing the basic exemption threshold to Rs 5 lakh from the prevailing Rs 2.5 lakh. This is a move that could benefit all taxpayers.
At present, the highest tax rate with surcharge and cess for the taxpayer is 42.74 per cent, which when compared with some developed neighbouring economies is very high (Singapore is 17 per cent, while for Malaysia, it is 30 per cent). Rationalisation will help ease the burden on the taxpayers.
B] Standard deduction may be enhanced
An increase in the Standard Deduction for employees from the current Rs 50,000 to Rs 1 lakh would have a direct impact on the tax outflow for taxpayers. At present, this Standard Deduction is only available for taxpayers who opt for the regular tax regime. The government could explore extending this benefit to all taxpayers irrespective of the option selected. Increasing the Standard Deduction will help improve the take home pay for many employees.
C] Deductions under chapter VI-A
The limits for deduction under Section 80C of the Income-tax Act, 1961 have been capped at Rs. 1.5 lakh since FY 2014-15, and it’s high time this is revised. Most deductions under Section 80C encourage taxpayers to invest in long-term savings, such as Public Provident Fund (PPF), National Pension System (NPS) and fixed deposits that provide long-term finance for infrastructure projects.
The government can evaluate the option of enabling this benefit for the simplified regime as well.
D] Relooking at exemption for retrenchment compensation and voluntary retirement scheme
Last year, on account of the economic crises created by the Russia-Ukraine War and the global recessionary trends, several companies have undergone downsizing operations. As a result of this, many employees have received the pink slip along with the compensation for lay-offs. The current tax provisions have limited avenues in terms of tax-saving, namely retrenchment compensation and voluntary retirement scheme.
However to avail oneself of this deduction up to Rs 5 lakh, the employer must satisfy certain conditions, which at times may not be satisfied. Thus, in such cases, the employee could lose the deduction if the employer’s scheme does not satisfy the requisite conditions. The Budget should look at some process to ease this hardship
Given the push for low-cost housing and fuel conservation, the government should extend the benefit for at least another year and also rethink on increasing the deduction threshold for the same. Given the increase in hospitalisation costs, the limits under Section 80D can be relooked at.
At present, health insurance premium is capped at Rs. 25,000 for preventive check-up for self, spouse and dependent children, and Rs. 50,000 for parents, which could be enhanced to at least Rs 1 lakh in view of the latter’s seniority.
The expectations of taxpayers is that the coming Budget should help reduce tax liability and increase take home pay. However, whether the finance minister lives up to expectations or chooses to stick to her plan similar to the previous years, remains to be seen.
The author is a Partner at Deloitte India
(Disclaimer: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.)