Income Tax: Will the Union Budget take that leap of faith?

On July 23, Nirmala Sitharaman will become the first Union Finance Minister to present seven consecutive budgets, surpassing former Prime Minister Morarji Desai’s record of six. The Union Budget 2024 will be the first major policy document of the new government. It is expected to reinstate the ambitious plan to make India the third-largest economy by 2027 and a developed economy by 2047. More importantly, pinned to this budget are high hopes of seeing proposals for real impactful changes to personal income tax, rather than some window dressing.

Income tax slabs & rate changes

The tax rates for individuals under the old regime have not been changed since the financial year 2017-18. The new ‘default’ regime was first introduced in the financial year 2020–21.

Due to making the new regime a ‘default regime’  and only selective changes in the last three Union Budgets, there is a disappointment among the middle class including the salaried ones, for not getting the tax benefits equal to sail through rising cost of living and inflation. Only about 50-55 per cent of taxpayers have moved to the new regime, reflecting that many simply do not find it rewarding, as anticipated.

Our headline personal income tax rate is 39 per cent under the new regime (including 30 per cent tax + 25 per cent surcharge + 4 per cent health and education cess) and 42.744 per cent under the old regime (30 per cent tax + 37 per cent surcharge + 4 per cent health and education cess). This compares poorly with some of our neighbouring countries such as, Hong Kong (where the incidence is 16 per cent ), Mauritius (20 per cent), Singapore (24 per cent), or Malaysia (30 per cent).  A complete overhaul of the tax rates and slabs will certainly reduce the compliance burden, and address the disparity concerns between personal and corporate taxation.  

Upward revision of deductions 

Presently the overall limit of Section 80C (which include life insurance premia, contributions to provident fund, etc) is capped at Rs. 1.5 lakh and was last amended in 2015. In the case of Section 80CCD  (covering contribution to NPS), to bring parity with government employees and incentivise further, other employees also should be allowed to contribute up to 14% of their salary and the annuity received should be fully exempted. Again, Section 80D (health insurance premia) capped at Rs. 25,000 / Rs. 50,000, was last amended in 2015 / 2018, respectively. 

Section 80EEA covers deduction in respect of affordable housing. Since the new government is making a fresh push for an additional 3 crore rural and urban households under ‘the Pradhan Mantri Awas Yojana’, the erstwhile lapsed condition for availing deduction under this section should be reinstated up to March 31, 2029.

Section 80TTA, under which deduction for interest in savings account is capped at Rs. 10,000, was inserted in 2013 and there were no revisions thereafter. The cap should be increased to Rs. 25,000 (half of similar benefits extended to senior citizens under Section 80TTB). 

Standard deduction was reintroduced in 2018 at Rs. 40,000 and increased to Rs. 50,000 in 2019, and allowed the salaried taxpayers to claim even under the new regime in 2023. To off-set inflation and reduce the compliance burden, the Finance Ministry may increase the limit to Rs. 75,000 for one time under both regimes. 

A complete revisit of allowances needed

Section 10(13A) covering house rent allowance (HRA) was inserted in 1964, to meet the expenses in connection with the rent of the house. Since its inception, the income tax law recognises only four cities as ‘metros’ allowing 50 per cent of the basic salary as HRA, which is limited to 40 per cent in the case of other cities. Interestingly, the Constitution of India, back in June 1993, recognised other cities such as Bengaluru, Coimbatore, Hyderabad, Kochi, Madurai, Pune, Thiruvananthapuram and some more as metros. It is high time, the finance ministry revisits the list of cities and add more cities as per the Constitution, if not as per the 2011 census/wait for the completion of the long pending 2021 census.   

Section 14(ii) grants a special allowance to employees for working under certain set of conditions. This was brought in 1989 and was last amended in 1995.  It covers compensation allowance of Rs 800 a month, children’s education allowance of Rs 100 a month (covering a maximum of two children), hostel expenditure of children capped at Rs 300 a month (again limited to two children), transport allowance of Rs 1,600 a month and other such provisions. The amounts are long overdue for a revision. 

Finally, the revenue forgone from the above changes can easily be set off by the buoyancy in income tax, corporate tax, GST, central excise duty collections and the major dividend payouts being made by Reserve Bank of India and other public undertakings, besides other non-tax revenues.