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BUDGET EXPECTATIONS : PERSONAL FINANCE

21 Jan 2023 , 08:48 AM

Broadly, people want a lower tax burden, more flexibility to save tax and a more simplified tax regime. Here is what taxpayers are expecting on the direct and personal taxation front.

  • The current taxation system at the entry level is too confusing. The basic exemption limit of Rs2.50 lakhs is just too low. Of course, you pay zero taxes till the time your net income is Rs5 lakhs as the gap is filled with the rebate. What taxpayers are asking for is to just raise the base tax free limit to Rs5 lakhs so that it can benefit all tax payers across the board. 
  • If taxes at the entry level need tweaking, so do the taxes at the higher end for people earning more than Rs1 crore or Rs5 crore. In these cases, the peak rate of tax including surcharge and cess can go up to as high as 44%, which is rather unfair. Globally, the peak rates of tax don’t go beyond 20-25% and India must at least come lower to the range of 35% if not 25%. Giving relief to the top brackets can release a lot of free funds for equity investing and for premium product spending.
  • There is also the issue of the dual rate structure that exists. You can either choose the old system with all the exemptions and rebates and the old rates of tax or opt for the concessional tax regime with no exemptions. One objection is that the new system also takes away standard deduction and health insurance breaks. The Budget 2023-24 can either look to merge the two system with a higher base exemption limit or strengthen the new tax regime with at least basic exemptions like standard deduction, Section 24 and Section 80D. This is likely to make it more popular compared to its current 1% penetration among the taxpayers.
  • It is time to revamp Section 80C limits to a large extent. For instance, the current exemption limit of Rs1.50 lakhs was last set more than 15 years ago and has largely lost its meaning. If you take a 30 year old employee and just add mandatory contributions to Section 80C like life insurance, contributory provident fund and tuition fees for children, you are likely to exceed the Section 80C limit. Hence an increase to Rs5 lakhs is called for, at the bare minimum.
  • It is not just about the size of the limit but about directing funds to select investments through a targeted tax regime. For example, NPS contributions get an additional Rs50,000 exemption. What the government can do in the budget is to offer a special limit of Rs1 lakh to ELSS. It can combine active funds, passive funds and a special DLSS scheme under this header. That can be a good starting point.
  • The current tax breaks on home loans are just too complex. Home loan exemptions under Section 24 of the Income Tax Act must be linked to the cost of housing. The current limit of Rs2 lakhs pre-supposes home prices  that don’t even get a home in smaller towns and cities, leave alone metros. It is time to expand the limit to around Rs5 lakhs, which would be more meaningful from an asset price perspective.
  • There is also the need to simplify the home loan benefits structure a little more. Today, there is interest on home loans under Section 24, principal on home loans under Section 80C, plus additional tax exemptions for first time purchase of homes and for low cost affordable homes. All these benefits pertaining to a home can be just consolidated into one single limit of Rs5 lakhs. It is simpler and also more flexible.
  •  On the capital gains front, let us first talk about long term capital gains (LTCG) tax. It is time to get rid of LTCG tax on equities to boost capital market participation, since it is adding little value but skewing the long term returns on equities. Also, one option is to keep a 3 year holding condition for full exemption, which is reasonable.
  • The next item pertains to short term capital gains (STCG) tax on equities. It is charged on equities held for less than one year at 15%. One demand in this budget is that a basic exemption be provided to give incentives to the investors. Like in the LTCG case, even short term gains on equities can have a base exemption of Rs1 lakh per financial year. The budget must also explore if it is a good idea to treat intraday profits as speculative gains rather than STCG, since F&O trades are not treated as speculative gains.
  • While scrapping of STT is unlikely due to its huge revenue potential of $3 billion, the budget can be expected to cut down on the dividend tax to 10% in phase 1 and then scrap it altogether. It can retain the HNI tax on dividends at a nominal rate of 10% beyond a threshold of Rs1 million per year of dividends. Taxing dividends is double taxation since it is already a post-tax appropriation.
  • There is also the issue of buyback tax. It is expected that Budget 2023-24 would transfer the onus of buyback tax back to the individual shareholder. The current system of the company paying the tax is unfair since even the shareholders not participating in the buyback offer end up paying tax. By classifying buybacks as capital gains tax, the tax would be paid by the beneficiaries and also at a concessional rate.
  • The next big demand is to make health insurance more affordable, which is now almost recognized as a basic need for people. The problem is that the premium on health insurance is facing GST at the rate of 18%. That is just too high. It is time to reduce the rate from 18% to 5% to make them more affordable. 
  • There is also a demand on the tax exemption on health insurance premium under Section 80D. The current Section 80D exemptions of Rs25,000 for those under 60 and Rs50,000 for senior citizens; can ideally be enhanced to Rs50,000 and Rs75,000 respectively. Alternatively, the budget can just offer a blanket annual exemption limit of Rs1 lakh instead of breaking it up into compartments.
  • The budget should move towards workable tax breaks on education. Under Section 80E, interest on education loan can be claimed without upper limit. However, there is an outer tenure of 8 years. This must be increased to 15 years to make it more meaningful. It is also high time that government offers a 5% interest subsidy on education loans so that it become more affordable. 
  • Extending the discussion on the education front, today many parents send their children abroad to study. The new rules under Liberalized Remittance Scheme (LRS) are fairly skewed. Also, for parents remitting fees for tuitions and hostel fees of children, remittances above Rs7 lakhs a year are liable for TCS (tax collection at source) at 5%. The limit must be raised to Rs.1 crore, so taxpayers don’t have to just wait for a refund.
  • It is time to raise the standard deduction limit from the current Rs50,000 per year to Rs100,000 per year. In addition, it can be extended to all tax payers, apart from just the salaried and the pensioners. That would be more equitable.
  • One way to put things on auto mode is to automatically adjust exemption levels once in 3-4 years based on the way dearness allowance is automatically hiked based on the cost price index. This would avoid the arbitrariness
  • The work-from-home model is picking up. To cover the higher expenses on communication and bandwidth, a special allowance of Rs50,000 per annum can be given as an additional WFH exemption.
  • It is time to recognize the PAN (permanent account number) of Income Tax as the single business identification document. This can avoid multiple identification forms and tracking will be automatic.
  • Lastly, small businesses are structured as proprietorships, partnerships or LLPs. Hence they pay peak 35% taxes compared to corporates that now pay between 15% and 25%. This must be rectified to make the system more friendly to MSMEs.

Related Tags

  • Budget
  • Budget expectations
  • personal finance
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