Background
As India gears up for the Union Budget of 2024, expectations are high among taxpayers regarding potential reforms in personal taxation. The budgetary announcements are eagerly awaited as they often introduce changes that impact individual taxpayers directly.
The landscape of personal taxation in India has evolved significantly over the years, shaped by economic reforms, changing fiscal policies, and efforts to simplify the tax structure. In recent years, significant reforms have been introduced, such as the introduction of the concessional new tax regime under section 115BAC, aimed at simplifying tax compliance and reducing the tax burden for individuals. This regime offers concessional tax rates but restricts many exemptions and deductions available under the old regime. The Finance Act 2023 made the new regime the default option for taxpayers, unless they specifically opt for the old regime.
The Union Budget is expected to focus on employment generation, rationalizing the tax rates, increase in limits for basic tax exemption, standard deduction, medical expenses, rationalization of tax rates and certain social security investments. Some of the key changes that an individual can expect from the upcoming budget are as under:
1. Removal of the highest slab of 42.7% and restricting the same to 35.88% as very few persons are covered by the same
The maximum marginal tax rates under the old and new tax regimes are currently 42.74% and 39%, respectively, which is quite steep. There is a strong argument for reconsidering these high rates, as they affect only a small percentage of taxpayers.
Recently, the government has taken steps to rationalize corporate tax rates, setting them at 25.17% for general companies and even lower at 17.16% for eligible manufacturing companies. Additionally, the Minimum Alternate Tax (MAT) regime has been eliminated for these corporations, making the corporate tax structure one of the most competitive for a growing economy. Further, the highest tax rate for individuals in several developing economies such as Thailand, Indonesia, Malaysia, Philippines, Vietnam, etc. is quite less than that prevailing in India.
In contrast, personal tax rates remain relatively high. To address this imbalance, it is expected to reduce the maximum marginal rate to 35.88% (30% plus 15% surcharge plus 4%) so that the personal tax rates regime is also incentivized by the reduced tax rates and brought in consonance with the rationalized tax rates for corporates. Implementing this adjustment would streamline the tax structure by reducing the number of tax slabs from 7 to 5 under the old regime and from 8 to 7 under the new regime.
Such a revision would aim to make the tax system more equitable and efficient, aligning with broader efforts to foster economic growth and simplify compliance for individual taxpayers.
2. Increase in basic exemption limit to Rs. 3.50 lakhs from the current Rs. 2.50 lakhs keeping in view inflation and non-revision of basic exemption limit for past several years
The current basic exemption limit of Rs. 2.5 lakhs under the old tax regime and Rs. 3 lakhs under the new regime is considered inadequate considering the year-on-year increase in inflation and the resulting increase in the cost of living. It’s notable that the basic exemption limit was last increased to Rs. 2.5 lakhs in 2014 under the old tax regime.
Therefore, there is a need for raising this limit to Rs. 3.5 lakhs for both tax regimes. This adjustment would provide relief to taxpayers and better align with prevailing economic conditions, ensuring a fairer and more equitable tax structure.
3. Convergence of Old and New Tax Regime
Presently there are 2 tax regimes for individuals, popularly known as old regime and the concessional / new regime. The new tax regime subjects the taxpayer to a concessional rate of tax on their income provided certain specified set of exemptions and deductions are not claimed by such person. Thus, there are certain pros and cons in each of these regimes wherein the old regime is fully loaded with exemptions and deductions whereas the new regime offers concessional tax brackets without claiming such exemption or deductions.
It is quite challenging for individuals to compute tax under both the regime and chose the most optimum regime on their own. Also, the provisions are not flexible enough to switch between the favorable regimes every year. Further, it is pertinent to note that the new tax regime has not received much of a traction to gain popularity amongst the taxpayer due to denial of basic deductions available such as standard deduction for salary, LIC premium u/s 80C and Mediclaim premium u/s 80D of the IT Act.
Thus, current personal tax structure in India is marked by complexity, primarily due to the coexistence of two tax regimes and a multitude of effective tax slabs ranging from 7 to 8. This complexity is further compounded by disparities in basic exemption limits and highest slab rates between the New Default Regime and the old Regular Regime. Additionally, certain tax deductions are unavailable under the new tax regime, adding to the confusion for taxpayers.
A potential solution to streamline and simplify the tax system would be the convergence of these two regimes into a single unified structure. This unified regime could feature a basic exemption limit set at Rs. 3.50 lakhs and a highest tax rate of 35.88%. Moreover, deductions under section 80C for specified investments and interest deductions for self-occupied property, along with section 80D deductions, could be retained. Such a consolidation is anticipated to enhance compliance, reduce the number of tax slabs, and provide clarity and consistency in the tax regime for individual taxpayers.
4. Rationalizing long term capital gain at 15% for all assets other than listed shares and uniform holding period of 24 months for other assets
As per the prevailing provisions of the IT Act, capital gains are taxed depending on their classification as long term or short term that further depends on the holding period of the capital asset which ranges from 12 months to 36 months which depends on the nature of capital asset. For instance, listed shares and listed units of equity oriented mutual funds have a threshold period of 12 months, unlisted shares and immovable property have a threshold period of 24 months whereas debt oriented mutual funds (acquired prior to 1 April 2023) have a threshold period of 36 months.
Also, there are multiple capital gains tax rates on long term capital gains (LTCG) depending on the type of capital asset. For instance,
– 10% above long term capital gains of Rs. 1,00,000 (u/s 112A) for listed shares, zero coupon bonds, etc.,
– 20% (u/s 112) for land and building,
– In case of off-market transfer, option to avail 10% tax rate for listed shares without claiming indexation benefit or 20% with indexation
– Short term capital gains (STCG) depending on the nature of instrument are taxed either @ 15% (u/s 111A) or as per the marginal slab rates applicable to the investor.
Thus, the existing capital gains tax structure for capital assets with multiple tax rates and the threshold period of holding results in unnecessary complexity for taxpayers.
Accordingly, apart from the capital assets specified u/s 112A and 111A (i.e. Listed Equity Shares, Unit of Equity oriented funds and Unit of Business Trusts), it is recommended to standardize the threshold holding period for all other categories of capital assets to 24 months. Further, the rate of tax on LTCG should be capped to 15%.
5. Increase in section 80C limit for investments to Rs. 2 lakhs
Section 80C of the IT Act provides a cumulative deduction limit to a bunch of investment-linked tax saving options such as life insurance premium, ELSS, PPF Contribution, senior citizen saving scheme, principal on housing loan, 5 year fixed deposits, Sukanya Samriddhi Yojana, etc. This section also enables individual taxpayers to avail benefit for certain expenditures such as towards children’s tuition fees, principal repayment of home loan, etc. Individual taxpayers are seeking amendment under this section from past 5-7 years as the present limit of Rs. 1,50,000 is very less against the number of investments options and was last revised in Budget 2014.
Thus, to bring the 80C deduction limit on par after factoring the annual inflation, it is recommended to increase the limit of deduction under this section to Rs. 2 lakhs. Also, such an increase which impacts a significant majority of the taxpayers has been long overdue.
6. Applicability of grandfathering provisions in case of tax neutral transfer (say, distribution of listed shares by Private Family Trust to beneficiary)
As per the prevailing provisions of section 55(2)(ac) of the IT Act, grandfathering benefit i.e. exemption on capital gains accrued upto 31st January 2018 is applicable on listed equity shares which were acquired / received by way of transfer prior to 1st February 2018. However, the said section does not specifically provide for extension of such grandfathering benefit to the recipients of such shares who have acquired such shares via tax neutral transfers (for instance, inheritance) post 1 February 2018 but the original purchaser had purchased the same before 31 January 2018. Accordingly, there are several tax neutral transfers which are not covered within the ambit of grandfathering.
Thus, the said grandfathering benefit must also be extended to tax neutral transfers as aforementioned to avoid genuine hardships to the taxpayers.
Author Bio
