As we get closer to February 1st, we see wish lists from all segments of society. Among the hopes of numerous industry organizations, investment groups, and corporations is the voice of the salaried class, which looks to the Union Minister of Finance for tax relief and rate decreases.
Pay cutbacks, layoffs, inflation, and increased medical expenses, have been exceedingly difficult on taxpayers in recent years. As a result, the taxpayer hopes, as they do every year, that this year’s Union Budget will give much-needed tax relief.
A] Tax reduction
Since 2017-18, the personal income tax slabs and rates have remained unaltered. The only change was the introduction of the ‘Simplified Tax Regime,’ which offered a choice of lower tax rates at the expense of several deductions and exemptions enjoyed by salaried persons.
According to the finance minister, the Simplified Tax System will save taxpayers an average of Rs. 78,000 compared to the traditional tax regime. This, however, does not account for the tax breaks and deductions available to most taxpayers for home rent allowance (HRA), leave travel allowance (LTA), and housing interest. As a result, it is hardly surprising that the new leadership has attracted very few supporters during the previous two years.
It is expected that the government will continue a clear tax decrease and adjust the tax rate this year to simplify the tax regime and boost cash flows for taxpayers.
Some recommendations include raising the basic exemption level to Rs 5 lakh from the current Rs 2.5 lakh. This may be a win-win situation for all taxpayers.
Currently, the maximum tax rate with surcharge and cess for the taxpayer is 42.74 percent, which is relatively expensive when compared to several established neighboring countries (Singapore is 17 percent, while for Malaysia, it is 30 percent). Rationalization will assist in easing the strain on taxpayers.
B] The standard deduction might be increased.
An increase in the Standard Deduction for Employees from Rs 50,000 to Rs 1 lakh will directly impact taxpayers’ tax outflow. This Standard Deduction is now only accessible to taxpayers who choose the ordinary tax regime. Regardless of choice, the government might consider extending this benefit to all taxpayers. Increasing the Standard Deduction will help many employees enhance their take-home income.
C] Chapter VI-A Deductions
Since FY 2014-15, the deduction limitations under Section 80C of the Income-tax Act, 1961, have been restricted at Rs. 1.5 lakh, and it is past time for this to be changed. Most Section 80C deductions encourage taxpayers to invest in long-term savings, such as the Public Provident Fund (PPF), National Pension System (NPS), and fixed deposits, which offer long-term financing for infrastructure projects.
The government might consider permitting this advantage under the simpler regime as well.
D] Reconsideration of retrenchment compensation exemption and voluntary retirement scheme
Several corporations downsized operations last year due to the economic crisis caused by the Russia-Ukraine War and worldwide recessionary tendencies. As a result, many employees received the pink slip and compensation for layoffs. The existing tax regulations provide few opportunities for tax savings, primarily layoff compensation and a voluntary retirement plan.
However, to claim this deduction of up to Rs 5 lakh, the employer must meet specific requirements, which are only sometimes met. Thus, the employee may forfeit the deduction if the employer’s plan does not meet the essential standards. The Budget should consider a procedure to alleviate this burden.
Given the emphasis on low-cost housing and energy saving, the government should continue the benefit for at least another year and reconsider raising the deduction level. Given the rise in hospitalization expenses, Section 80D restrictions should be reconsidered.
Currently, health insurance premiums are restricted at Rs. 25,000 for preventative check-ups for self, spouse, and dependent children, and Rs. 50,000 for parents, which might be increased to at least Rs 1 lakh due to the latter’s seniority.
Taxpayers anticipate the next Budget to help cut tax liability and enhance take-home income. However, whether the finance minister lives up to expectations or sticks to her plan as she has in recent years remains to be seen.