Tax slabs rejig:
Basic exemption limit and the tax slabs have seen less than desired increase over the last several years, in spite of the spiraling high inflation curve, leaving little than required disposable income in the hands of the middle class. Past budgets introduced new tax regime providing multiple slabs with lower tax rates, however, the same was not received well by the taxpayers.
Considering the current inflation rate and the fact that the middle class is already reeling from the effects of the Pandemic, a serious rejig in the tax brackets is the need of the hour. The FM could consider measures such as increasing the basic exemption limit from the current limit of ₹2.5 lakhs to ₹ 4.0 lakhs. Further, at present income above ₹5 lakhs up to ₹10 lakhs is taxed at the rate of 20%. A slab could be inserted in between and with a lower the tax rate from of 10% or 15%.
Incentivise savings and investments:
Enhance investment deduction limit under section 80C and insurance premium in 80D: The current Section 80C limit, INR 150,000, needs a revisit. This limit has been unchanged for almost a decade now. The increase in deduction limit would incentivize the taxpayer to save and invest more which in turn would augment capital expenditure in the country. Further, it is time to declutter the bucket of Section 80C as currently it accommodates various investment and insurance avenues.
Also Read : Crypto exploit losses in January see nearly 93% year-on-year decline
Another aftermath of the Covid-19 pandemic has been an increase in the cost of health treatment in India, which in turn has resulted in hike in health insurance premium. The government should look to increase the deduction limit to INR 1,00,000 from the existing deduction limit of INR 25,000 / INR 50,000 to encourage the middle class invest consciously in health related areas.
Higher deduction for interest on savings account:
Section 80TTA of the Income-tax Act provides for deduction for interest on saving bank account. However, this exemption is not available for interest on term deposits. Interest rates on bank deposits have witnessed a fall over the years. Combined with this, the lower exemption limit discourages placement of bank deposits. In order to encourage flow of funds into the banking sector, the 80TTA exemption limit should be increased from current ₹ 10,000 to at least ₹ 30,000. Further, interest on term deposits should also be included within the exemption scope.
Revisiting standard deduction/ introduction of deduction for home office expenses for salaried employees:
An increase in the current limit of standard deduction of INR 50,000, which has substantially remain unchanged for several years now, is also expected in the upcoming budget by the salaried class.
The culture of Work from Home post covid pandemic has been adopted by organizations worldwide to provide flexibility to employees and retain talent. This also reduces pressure on Tier 1 cities, with people interested in working from their hometowns in smaller cities. To give a further impetus, the government should provide relief for the expenses incurred by the employee such as cost of furniture, high speed internet, increased cost of electricity and mobile expenses etc.
Revisiting children’s education and hostel allowance:
It’s been almost two decades since the child education and hostel allowance have seen a change. At a mere ₹ 100 and ₹ 300 per child per month, this allowance is far from reality. Accordingly, the FM could consider raising the limits to ₹1,000 and ₹3,000 per child per month, respectively.
Hike in Tax Exemption limit for Homebuyers:
The need for real estate has increased in India post covid pandemic. To provide relief to the middle class community, a further extension of 2-3 years in claiming the deduction under Section 80EEA of the Income-tax Act may be provided for interest paid on housing loans. Further, a hike in the deduction for interest paid on housing loans (Section 24b) is needed.
Simplification of Capital Gains and Increase in exemptions of Long-term Capital Gains (LTCG):
Retail investor participation in the stock market has increased. Companies including SME looking at fund raise are on the rise, which in turn helps employment generation, increased GDP and last but not the least increased tax flows for the Exchequer. Currently, LTCG on sale of listed equity shares are taxed at the rate of 10%. Also, LTCG up to ₹ 1,00,000 are exempt. To keep the retail investor invested for the long term, the exemption limit of INR 1,00,000 may be increased.
Further, taxation of capital gains is quite complicated in India. The holding period criteria is different for the different types of capital assets. The tax rates also vary based on the type of capital assets transferred by the taxpayer. In the upcoming budget, investors are hopeful for simplification of taxation of capital gain which would reduce unwarranted tax disputes.
Signing off:
Across his public messages, the Prime Minister has reiterated his team’s intent of uplifting the status of the lower to middle class communities in India. A myopic stance to protect the tax base may prove to be counter-intuitive. A holistic view of the current situation demands that the upcoming Budget actually be a Populist one!