Interim Budget 2024 Expectations: Taxation and Deduction Reforms

1. Background

Based on the past trend analysis of the Interim Budgets, it has been observed that Interim budgets are mostly continuation of the existing policies, and major policy changes or new initiatives are generally avoided. As such, no significant changes are announced in the Interim Budgets. This has also been affirmed by the Finance Minister’s comment regarding the 2024 Interim budget claiming no spectacular changes to be announced considering that the upcoming budget would be a “Vote on Account” budget wherein the government seeks Parliament’s approval for the expenditure required to meet its essential obligations during the interim period and is usually granted without a detailed discussion on the budget. In interim budgets, the tax structures and rates are generally not revised and significant changes to taxation are usually proposed in the subsequent full budget presented by the newly elected government.

The latest Interim Budget passed in 2019 proposed certain changes for individual taxpayers. It is entirely possible that the government may not make any changes or make certain minimal changes which are of wide applicability. The basic changes which can be expected by the taxpayers either by way of amendments or by way of announcements to be implemented if the ruling party was voted back to power are discussed hereinbelow:

2.0 Expectations from the Interim Budget 

2.1 Increase of Basic Exemption Limit from Rs.2.50 lacs to Rs.3.5 lacs

Currently, the Income Tax Act, 1961 (hereinafter referred to as ‘the IT Act’) provides for a basic exemption limit of Rs.2,50,000 which has remained unchanged for several years. Given the current annual inflation rate of about 5%, higher cost of living and the time which has elapsed since last revision, it is expected that the basic exemption limit is increased to Rs. 3,50,000. This will benefit a large number out of the approximately 7 crore taxpayers and provide them some insulation against inflation.

2.2 Increasing the threshold limit for investment linked deductions under section 80C

One of the very popular deductions which many taxpayers avail is u/s 80C of the IT Act which provides for investment linked deductions such as Provident fund, ELSS, life insurance premium, housing loan repayment, 5 years bank deposits, etc. The existing threshold limit of Rs. 150,000 under this section was last revised in the Budget 2014. Thus, considering the inflation over the years and the greater need for financial security due to economic uncertainty, the threshold limit should be enhanced to Rs. 200,000.

2.3 Enhancing the threshold limit for Section 80D and applicability of medical expenditure to be extended to individuals other than Senior citizens

Section 80D of the IT Act provides for deduction with respect to the medical premium paid. Such deduction is restricted to Rs. 25,000 and in case of senior citizens, the maximum threshold has been restricted to Rs. 50,000. However, there has been a spike in the health insurance premiums due to the covid pandemic and inflation as well as need for higher coverage. Thus, there is a need to enhance the threshold from existing Rs. 25,000 to Rs. 50,000 for non-senior citizens and for senior citizens from Rs. 50,000 to Rs. 75,000.

2.4 Tax on Dividends Distributed by Domestic Companies to be Restricted to 20%

Under the existing provisions of the IT Act, there is a double taxation of income in case of companies – firstly the companies pay corporate tax and then the shareholders pay tax on the dividends. In case of resident individual shareholders, the tax on dividends can be as high as 35.88%. On the other hand, non-residents are liable to tax on dividends @ 20% (plus surcharge and cess) which gets further lowered by Double Tax Avoidance Agreements to 5%-15%.

In order to reduce the cascading effect of double taxation, it is expected that the maximum tax on dividends distributed by domestic companies in the hands of resident shareholders be limited to 20% (plus surcharge and cess).

3. Conclusion: As the Interim Budget 2024 unfolds, these expectations signal potential reforms in taxation and deductions. The proposed changes align with economic shifts, emerging needs, and the government’s commitment to addressing key financial concerns. Taxpayers await clarity on these expectations, looking to the budget for insights into the fiscal landscape and potential benefits for individuals and businesses.