Budget 2023: For Individual Taxpayers, Changes Are Long Due Higher disposable incomes in the hands of consumers will give them the confidence to spend and invest for the future—personal tax reforms is a powerful tool to achieve this objective

The Indian economy has fared relatively well in a global environment that is grappling with economic uncertainty, high commodity prices and evolving international dynamics. Hopefully, COVID is well behind us with trade, tourism and consumer spending now recovering. Higher disposable incomes in the hands of consumers will give them the confidence to spend and invest for the future—personal tax reforms is a powerful tool to achieve this objective.

Change in tax slabs and tax rates

The tax rates for individuals have not been changed since FY 2017-18. The new tax regime was introduced in FY 2020-21 with lower tax rates at certain income levels (if one forgoes certain deductions and exemptions) but there was no change in the highest tax rate applicable. The highest tax rate (after including surcharge and cess) for income exceeding INR 5 crore is currently at 42.744 per cent; the lowest tax rate for companies is 25 per cent. To align the individual tax rates with the corporate tax rate and to give more purchasing power to individuals, the highest tax rate of 30 per cent can be reduced to 25 per cent. Additionally, the threshold limit for the highest tax rate can be increased from INR 10 lakh to INR 20 lakh. This will result in reduction of highest tax rate of 42.744 per cent, to 35.62 per cent.

To make the new tax regime attractive to taxpayers, the income tax rate could be 20 per cent for income slabs between INR 10 lakh and INR 20 lakh (currently this varies between 20 per cent to 30 per cent) and 25 per cent for income exceeding INR 20 lakh.

Increase in the limit of various deductions

Section 80C: Currently deduction under section 80C of the Act for payments/investments towards life insurance premia, contributions to provident fund, subscription to certain equity shares etc., is capped at INR 150,000, which is very low. The government may consider increasing the exemption limit to at least Rs. 2.5 lakhs considering the inflation rate, reduce the burden on taxpayers and individual taxpayers would be willing to save more. This limit too has remained unchanged since FY 2014-2015

Section 80TTA: Section 80TTA provides for deduction of up to INR 10,000 in the hands of individuals in respect of interest on savings account with banks, post offices and co-operative societies carrying on business of banking.

Interest on all types of bank deposits (for example, FDRs) should be included within the scope of section 80TTA, rather than limiting the deduction to saving account interest, as it is unlikely that individuals would keep their entire savings in a savings bank account, which earns a much lower rate of interest as compared to term deposits. Further, the limit should be increased from INR 10,000 to INR 50,000.

Section 80D: Deduction in respect of health insurance premium is currently capped up to INR 25,000 and INR 50,000 in case of senior citizens. Considering the increase in the cost of medical treatment on account of the pandemic, the cost of comprehensive insurances too have increased and hence there is a need to increase the deduction limit to INR 50,000 and INR 100,000, respectively.

80EEB: Deduction in respect of interest payable on loan taken for purchase of an electric vehicle, provided the loan has been sanctioned by the financial institution up to 31 March 2023. The condition for availing loan for purchasing an electric vehicle should be extended for at least 2 years i.e. up to 31 March 2025, considering that the demand for electric vehicles is growing every day.

Elimination of double taxation

Currently employer contribution to provident fund, superannuation and NPS exceeding INR 750,000 and any accretions on the same, is taxable in the year of contribution and the employer is responsible for withholding taxes on the same.

The same PF/superannuation balance, when withdrawn, would be subject to tax withholding if the conditions for exemption (e.g. five years of continuous service) are not complied with and there is no specific exemption provided for excluding the income already taxed as mentioned above. Hence, there could be double taxation, at the withdrawal stage to the extent the contribution/accretion has already been taxed. The government should provide for a specific provision in the Income Tax Act, providing exemption in respect of contributions/accretions which are already taxed earlier, at the time of PF/superannuation withdrawal.

Extending the last day of filing tax returns

Currently the last date to file tax returns (belated or revised) is 31 December (i.e. nine months from the end of the concerned FY). This poses challenges for individuals working and paying taxes overseas for availing foreign tax credit while filing the India tax return, as many jurisdictions follow calendar year as their tax year and the proof of tax payment is not available by this date. The upcoming Budget could consider extending this date to twelve months from the end of the FY.

Work from home deductions

The pandemic has taught us how to work from home and there have been lot of changes in the working culture across the globe. Today, organisations practice work from home, remote working, hybrid working etc. However, there are no exemptions which are provided from an income tax perspective on account of the new work arrangements.

Therefore, the government may look at announcing certain guidance/policy related aspects with respect to the same, including tax benefits for employees for various benefits provided by the employer, to enable employees to work from home.

The above measures will help increase disposable incomes in the hands of consumers and help sustain the economic recovery. The authorities will do well to recognise that some of the limits/ values have not been updated for years and relief needs to be provided to the taxpayer.