The expectations of individuals from the Union Budget 2023 are high as it would be the last full Budget of this government before the general elections in 2024. Here are some goodies that individual taxpayers are hoping for:

Making concessional tax regime (CTR) more attractive

The objective of introducing the CTR was to make compliance simpler for individual taxpayers. However, based on public data, the adoption rate of CTR is very low amongst the individual taxpayers. Under the CTR, one can pay tax at reduced tax slab rates while foregoing certain exemptions and deductions, such as House Rent Allowance (HRA), Leave Travel Allowance (LTA), interest on housing loan, Sec 80C deduction on LIC premium, investment in Public Provident Fund (PPF), Provident Fund (PF), etc.  

Most taxpayers are paying rent or repaying housing loan, contributing towards the Employees’ Provident Fund (EPF), paying health insurance premiums and are making investments in PPF and PF. For such taxpayers, if they were to compare the CTR with the old tax regime, they may find their tax liability to be higher even with lower slab rates. Accordingly, such taxpayers prefer to continue with the old tax regime.

Thus, there is a need to make changes to the CTR to make it more effective for individual taxpayers. The government could propose the following changes in CTR to make it more attractive:

·        The tax slab may be modified to make 30 per cent tax rate applicable only on income exceeding ₹20 lakh. The government may also consider changing the tax rates at lower income levels. The proposed rates could be as below:

·        Standard deduction of ₹50,000 from salary may be retained as salaried individuals do not get a deduction for any expenses incurred by them under CTR

Deduction on interest paid on housing loan for self-occupied house property should be available under the CTR. This will encourage investment in the housing sector.

Contributions/investments to EPF, PPF, life and health insurance premiums, etc. are necessary means of providing financial and social security as well as helping in building a corpus for retirement. Deductions under section 80C could be provided for limited avenues such as contributions to EPF, PPF, and qualifying life insurance products under the CTR.

Similarly, deductions for payment of health insurance premium for self and parents and self-contribution towards National Pension Scheme (NPS) should be allowed.

Simplifying capital gains taxation

The provisions in income-tax laws governing capital gains tax are wide, varied and may get confusing for the common man. At present, there are various tax rates or holding periods for the calculation of capital gains on different types of instruments falling within the same asset class. Even the indexation benefit differs in different situations. Tax rates also differ for residents and non-residents.

In line with the government’s objectives to bring simplification in taxation and improve the ease of paying taxes, the current structure should be rationalised in terms of rates and holding periods of various asset classes (equity, debt, immovable property).

Suggestions for other changes under personal tax

Some of the other changes that could be considered in the Budget are:

·        Extend the basic tax exemption limit to ₹5 lakh from the current ₹2.5 lakh

·        Reduce the maximum marginal personal tax rate that stands at 42.744 per cent today

·        Increase section 80C deduction limit to ₹2.5 lakh from ₹1.5 lakh.

·        Raise ₹2 lakh deduction threshold towards self-occupied house property interest to ₹3 lakh

·        Remove cap of ₹2 lakh towards the set-off of house property loss against other heads of income in the same year

·        Provide tax relief/rebate for employees working under a hybrid model

We need to wait and watch what the government has in store for individual taxpayers in the upcoming Budget, with the hope that it brings some relief to the common man.

The author is Tax Partner, EY India; Ajit Kamdar, Director with EY, contributed to the article

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