Discussions surrounding the upcoming budget session in 2023 have already begun, with people from all groups expressing what they seek from the government this time. The government has issued an open call for ideas and suggestions for the Union Budget 2023-24.
As inflation pinches people, the yearning for more income tax exemptions comes.
To start with, people want the government to raise the basic income tax exemption limit. The current exemption limit is ₹2. 5 lakh, which many feel is not enough. Considering those with income up to ₹5 lakh get a tax rebate under section 87A, it makes more sense to raise the exemption limit up to ₹5 lakh, thus, simplifying the first step in income tax calculations.
Despite lower tax rate applicability in the new tax regime, assessees prefer the older version owing to the exemptions listed in it.
Dev Ashish, Founder, Stable Investor, says, “There is a need to review the new exemption-free tax regime to make it more attractive and increase adoption. In absence of any exemptions, the deal can only be sweetened by further reducing the tax rates and reworking the slabs (& reduce it from the current six to 3-4 slabs max). To further reduce complexity and confusion, there is an urgent need to eventually have just one tax regime and provide stability to the personal tax architecture in India.”
Added benefits under Section 80C
Prior to every budget session, experts have stressed the need to increase the exemption limit under Section 80C of the Income Tax Act.
Rajani Tandale, Product Head – Mutual Fund, 1finance.co.in, says, “It was almost eight years back in 2014 -15 when the limit under 80C was hiked and since then individuals’ salaries and expenses have increased but the tax saving option limit has not increased. The enhanced limit not only eases the average taxpayer's burden, it also promotes greater household savings and keeps inflation under control.”
Raising the exemption limit can be a good start to give salaried taxpayers much-needed relief from the ever-increasing tax burden. More tax exemption limits under Section 80C will also prompt many assessees to increase their investments which will not yield them moderately good returns in the future but also help them save more on taxes.
However, some financial experts believe that, despite repeated requests from taxpayers, the government will not raise the exemption limit. Viral Bhatt, Founder, Money Mantra, says, “The priority of the government is different in the last two years as it tries to balance the impact of the pandemic and the growth prospects of the economy. So, many mutual fund participants concede that the government won’t have the bandwidth to attend to look at micro-level demands. So, the budget may try to put more money into the taxpayers through a reduction in rates. So, don’t harbour high hopes.”
“It will be hard for the government to make different exemptions for individual taxpayers. The government should look at increasing the exemption limit from the current ₹1.5 lakhs to about ₹2 lakhs minimum considering this will provide relief to the entire middle class. Alternatively, the government can also look at increasing the basic tax exemption to about ₹5 lakhs. Basically, the idea is to provide relief to the middle class from the burden of taxation," said Aditya Shah, Founder, JST Investments.
Doing away with LTCG tax
Remember those days when income from long-term capital gains (LTCG) and dividends was not taxed? While investors would want the government to abolish LTCG tax, the same seems far-fetched. The government had last year said that it had no plans to abolish long term capital gains tax.
Helping those with home loans
Loans have become dearer in the past year owing to increased interest rates. People either have to pay higher EMIs or opt for an increased loan tenure that in turn, forces them to pay more interest in the long run. The total payout is consequently much more than estimated while seeking the loan.
“Interest rates on home loans have gone up, pinching the home buyer. For existing homeowners, the tenure of the loan goes up, for new buyers, EMI goes up. Currently, ₹1.5 lakhs of principal is allowed as a deduction under Section 80C. If this is taken out from Section 80C and a separate tax deduction for home loan principal repayment is allowed over and above Section 80C, it would be a relief to home buyers. The post-tax income will go up due to the extra deduction and this would be a welcome change," says Pratibha Girish, Founder, Finwise Personal Finance Solutions.
Redefine holding period
Redeem mutual funds after a year, and the government imposes LTCG tax on earnings above ₹1 lakh at 10 percent. Another change sought from the government is redefining “holding period” or increasing the holding period for a period beyond a year.
Bhatt added, “In the case of unlisted equity funds, debt funds, and debt-oriented balanced funds if the holding period is longer than three years or 36 months, they are classified as long-term capital assets. If the period is less than three years, then it is considered short-term capital assets. So in my view the finance minister should do at par with unlisted equities and debt funds."
Allow unbridled switching
Switching from regular to direct mutual fund plans should not be considered a sale-purchase transaction and thus should not be considered for taxes or exit loads. The definition of sale-purchase should also exclude intra-scheme switching from growth to dividend (IDCW) plans or vice versa.
Remember the famous tagline “tension gayaa pension lene”? However, senior citizens rue how their pension income is also a source of tension considering that the government imposed a tax on it. While bringing in pension under the purview of taxable income, what was ignored is that policyholders are already paying the premiums toward their pension policies from the taxable income.
As a part of his 2023 Budget wishlist, Vighnesh Shahane, CEO and MD, Ageas Federal Life Insurance says, “To increase the penetration of pension and to make India a pensioned society, especially since we don’t have any social security cover, our request is to make pensions tax-free in the hands of the customer because the pension premium is already paid through taxable income.”
Shahane also added, “Currently, Section 80C of the Income Tax Act is cluttered with many investment options for tax benefits, and there should be a separate bucket for life insurance policies or the limit be increased from ₹1.5 lakh to ₹2.5 lakh. At least a separate section for term life insurance policies would be helpful given the huge protection gap in the country.”
Increase the tax base
Wishing for more deductions or lesser tax imposition may not be enough. Some financial experts dismiss it as nothing more than wishful thinking. The idea must be to increase the tax base than just reduce the tax net. “My guiding principle is that deductions are a very bad way to manage tax incidences—they create all kinds of perverse incentives," says Gaurav Rastogi, Founder, Kuvera.in.
A country’s infrastructure depends a lot on how much the people are willing to expend on taxes. The ITRs filed highlight the responsibility we have towards this country. Bringing more people into the tax base will also allow them to assume responsibility and participation in this country’s growth.