We are few days away from the upcoming Union Budget 2023, and like every year, expectations on personal tax front are soaring.

The following wish list seems to be on the minds of the individual taxpayers:

1) Realignment of income slabs

The basic exemption limit of ₹2.5 lakh has remained constant for many years now. The basic exemption limit can be increased to ₹5 lakh (under both the old and new tax regime) to enhance the net disposable income in the hands of taxpayers which will eventually help boost the overall economy.

Consequentially, other slab rates under the old and new tax regimes may either remain constant or be adjusted with the progressive rates of tax generally adopted.

2) Increase in standard deduction

Currently, the standard deduction allowed to salaried individuals is ₹50,000 per annum. Given the high inflation environment in the post-pandemic economy, the limit may be reconsidered and evaluated to be increased to at least ₹1 lakh per annum.

3) Simplification of the capital gains tax regime

The capital gains tax regime can at times be complicated to navigate through. The period of holding is different for different categories of asset. There are also different tax rates for each asset.

For example, the period of holding for debt instruments is 36 months, for immovable property is 24 months and for listed equity shares/equity oriented mutual funds is 12 months.

Yet another aspect is the capital gains tax (base rate), where long-term capital gains from sale of listed equity shares/equity oriented mutual funds are taxed at 10 per cent (on gains exceeding ₹1 lakh) and other gains are taxed at 20 per cent depending on the nature of asset.

This Union Budget 2023 may consider looking at simplifying the entire capital gains tax regime.

4) Changes to the new tax regime

The new optional tax regime was introduced from FY2020-21, wherein an individual gets an option to choose between the existing tax rates and the new tax regime.

Introduction of the new optional tax regime was a big step in the government’s mission to achieve a simplified tax regime.

However, many popular exemptions/deductions are done away with in this new scheme. (For example, HRA exemption, interest on housing loan relating to self-occupied property, Section 80C deductions etc.)

Hence, in order to increase the adoption rate among taxpayers and make the new tax regime more effective, the government may consider allowing the following exemptions/deductions even under the new optional tax regime:

  • Considering the need to build a comprehensive/universal affordable healthcare system across the country, it may be evaluated to retain the deduction for premium paid on medical insurance policy for self and family.
  • Purchase of a house property for self-occupation is a long-term financial commitment an individual makes. Therefore, it may be considered to retain deduction for interest on housing loan on a self-occupied property. If necessary, this may be allowed only for properties bought prior to the new optional tax regime was introduced.
5) Increase in deduction limit under Section 80C

The deduction limit of ₹1.5 lakh under this section of the Income-tax Act, 1961, has not been enhanced for several years now.

Increasing the deduction under Section 80C to at least ₹3 lakh per annum from the current limit of ₹1.5 lakh per annum would encourage the taxpayers to invest in long term savings, resulting in larger funds available for important sectors like schooling, housing, etc.

In summary, while there are lots of expectations on the personal tax front from the Union Budget 2023, other factors like direct tax collection, tax-GDP ratio, etc., will need to be factored in before making a final decision for the individual tax related provisions. 

(The author is Parizad Sirwalla, Partner and Head, Global Mobility Services-Tax, KPMG in India)