The Union Budget is perhaps the most awaited event for general Indians and investors alike. Before the year’s Union Budget is presented on February 1, 2023, let’s see what the common Indian taxpayers expect this year.
Basics of the Indian tax system
Before we discuss the taxpayers’ expectations, let’s get the basics sorted.
Tax is the primary source of revenue for the government. The tax structure of India is divided into direct and indirect taxes. Direct tax is levied on the taxable income of individuals, corporate and other entities. On the other hand, indirect taxes are collected on the sales of goods and services. An important feature of the Indian tax system is the multiplicity of taxes. There are union government and state government taxes.
The income tax system was introduced in India by James Wilson in 1860, the first Finance Minister of British India, to fill the treasury. The current Income Tax Act was introduced in 1961.
Income tax is the most talked about item of the Budget. According to a survey by TOI-Deloitte, online 85% of respondents said that their top priority for the common man is a reduction in the income tax burden. There has been no change in the income tax rates since 2017-18 (a simplified personal tax regime was effective in FY 21-22 but the tax rates remained unchanged ). So, the expectations are high.
Key asks from the Union Budget 2023
Restructuring individual income tax:
According to the existing tax structure, the income tax rate is nil for individuals earning ₹5 lakhs or less. But income exceeding ₹5 lakhs directly falls under the 20% tax bracket if opting for a regular tax regime.
There are exemptions provided based on the age of the taxpayers. For example, the minimum exempted limit for individual taxpayers below the age of sixty is ₹2,50,000. It increases to ₹3 lakh for taxpayers between 60-80 years (senior citizens) and ₹3.5 lakhs for super senior citizens. However, with the rising inflation of food and essential items, there is a demand for restructuring the exemption limits, changing the minimum exception level from ₹2.5 lakhs to ₹3 lakhs. A similar increase is expected in the senior citizen and super senior categories.
The following table shows the changes expected in the current tax slabs.
Regular Income Tax Regime: Expected Slabs & Savings
Deloitte analysis suggests that for an individual earning Rs 25 lakh, the current tax outgo will be Rs 585,000/- With the expected tax slabs, tax outgo will be Rs 481,000/- resulting in savings of Rs 104,000/- (without considering surcharge)
|Existing Slabs||Tax Rates||Expected Tax Slabs||Expected Tax Rates|
|Above 10,00,000||30%||Above 20,00,000||30%|
Income tax calculations include education cess of 4%. Source: TOI-Deloitte Budget 2023
According to the table above, the tax payout of ₹585,000 for an individual with ₹25 lakh income will reduce to ₹481,000 if the expected tax slabs apply, providing an instant savings of ₹104,000 without surcharges.
Currently, there are two tax regimes – the old tax regime (OTR) and the new tax regime (NTR). Under OTR, income above ₹1 million is taxed at a 30% rate, while in NTR the minimum cut-off is ₹1.5 lakh. It makes the NTR lucrative compared to OTR. Expectations are that the government will change the exemption limit of OTR to make it parallel to NTR.
Read also: Income Tax Slab for FY 2022–23
Hike limits of standard deduction: A common ask is a hike in the existing standard deduction and ₹1.5 lakh exemption available under section 80c of the Income Tax act.
A standard deduction is a certain amount fixed by the government that can be deducted from your taxable income. When you claim the standard deduction, it automatically reduces your taxable income.
An increase of ₹50,000 is expected in the standard deduction to raise it from ₹50 thousand to ₹1 lakh and exemption u/s 80c to ₹2.5 lakhs.
Moreover, OTR allows addtional deductions under sections 80C and 80D for specified expenses. For instance, a tax deduction is allowed for payment towards life insurance premiums, tuition fees, Provident Funds etc. But, the limit is capped at ₹1.5 lakhs in OTR. With the increase in inflation and expenditure, taxpayers hope the limit to rise to ₹2.5 lakhs.
Similarly, taxpayers expect the deductions received under 80D for ₹2.5 lakhs towards paying a health insurance premium for themselves and their dependants to increase by another ₹50 thousand to match the current inflation rate and cost of living.
Hike in a deduction in home loan repayment: A rise in bank interest rates has increased the installment amounts on home loans, increasing the burden on taxpayers. So, it is only normal to expect a hike in home loan repayment deduction.
Currently, ₹200,000 deduction is available on home loan interest repayment under the OTR. Home loan principal can be claimed for deduction for an amount of ₹150,000 u/s 80C of the Income Tax Act. The demand is to increase the deduction limits to give some relief to the homeowners and improve demand for the housing market.
Read also: Union Budget 2023: Stock Market Expectations
The ultimate objective of all these demands is to increase the savings of the salaried and individual taxpayers, encouraging them to make correct declarations. The government needs to take steps to lower the tax rates under the simplified tax regime to make it more attractive and acceptable.
Whether or not the government will live up to the expectations of the common taxpayers, will come to know tomorrow. But for now, keep following our blog for more Union Budget 2023 updates.
Whether or not the government will live up to the expectations of the common taxpayers, we will come to know tomorrow. But for now, keep following our blog for more Union Budget 2023 updates.