Will Budget 2024 bring Income Tax Relief for Middle Class? Expert Views
With the Union Budget approaching next week there is widespread anticipation regarding changes it might introduce. One main area of interest is potential adjustments in taxation policies. Many are eager to know if there will be any income tax relief measures. Or revisions to the capital gains tax structure. These aspects are crucial as they directly impact individual investors and overall economic sentiment. People are looking for clues on how these changes could affect their financial planning and investment strategies moving forward. Budget’s decisions in these areas are expected to influence market dynamics. Consumer behaviour will be significantly impacted in the coming months.
Here are the views of the Experts on Upcoming Budget
Q: Tax collections have increased this time and India’s Reserve Bank (RBI) gave out dividends, which have allowed the government to have slightly more financial space. With regard to taxes, can the middle class wait more? What are your overall expectations too?
According to the experts, there is enough reason for the middle class to hope for some relief in this budget. The current tax system for individuals has two regimes. The old regime offers several tax incentives but comes with a slightly higher tax rate. In contrast new regime provides fewer tax incentives but offers lower tax rates with more liberalized income slabs.
In the new regime, the basic exemption limit for individuals is set at Rs.3 lakh. Many believe it’s time for the government to increase this limit to at least Rs.4 lakh. Additionally, the standard deduction for taxpayers is currently Rs.50000 per year. There are high expectations that this will be increased up to Rs.1 lakh.
If the government continues with the old tax regime, there are also expectations for changes. The deduction limit under Section 80C has been fixed at Rs.1.5 lakh since 2014. This needs to be increased. Similarly, the deduction on interest for housing loans has been stuck at Rs.2 lakh for several years. This should also be raised. Overall, there are many expectations from individuals regarding personal taxes in this budget.
Q: Many of our viewers are retail investors in the market. They are curious about the potential for mutual funds to offer pension and retirement products. These would ideally have the same tax benefits as other tax-saving schemes like the National Pension Scheme (NPS). What can we expect on this front?
The experts say that it is a reasonable expectation and it’s uncertain if the government will extend those tax benefits to mutual funds investing in pension schemes.
Regarding the capital gains tax regime, many taxpayers hope for simplification. Currently, the regime is quite complex. It has different rates depending on asset category, holding period or taxpayer’s residential status.
Taxpayers expect the capital gains tax to be simplified and rationalized. One way to do this is to divide assets into two classes: financial and non-financial assets. For financial assets, a more relaxed tax regime could be applied. For example a 10% rate on long-term capital gains and a 15% rate on short-term capital gains.
For non-financial assets, the long-term capital gains tax rate could be set at 20% with an indexation benefit and short-term gains could be taxed at normal rates.
There are high hopes for this kind of rationalization of the capital gains tax regime. Another important issue is the buyback of shares by listed companies. When companies buy back shares through the open market shareholders end up paying capital gains tax without knowing to whom they are selling. The company also pays a buyback tax. This results in double taxation for the same transaction. Therefore, there is a need to eliminate the buyback tax for shares bought back through this method.
Q: More tax savings through higher exemptions are certainly appreciated. But main way many people have built wealth has been through investing in stocks. This has been a significant driver. The wealth effect has led to heightened sensitivity around stock taxation. Can we expect any rationalization in this area? What are your thoughts on this?
According to the experts if we look at recent economic data there is no longer a focus on expanding the tax base. The number of taxpayers has grown significantly. From 2 crore to about 6.5 crore. Now, the discussion is about how to provide more benefits to these taxpayers. Boosting consumption and putting more money in people’s hands is the goal.
One area to consider is employee stock ownership plans (ESOPs). Many companies are offering ESOPs now. However, they are taxed on the date of exercise. If this taxation could be postponed until the date of sale, it would encourage more people to opt for ESOPs. Paying taxes upfront without realizing any value is a challenge. The government should look at this change. This would help more people benefit from ESOPs not just those in startups.
Another idea is to increase the tax slab rates from three to five. Or raise the standard deduction from Rs.50,000 to Rs.125,000. This would leave more money in people’s hands. Additionally, changes in housing-related tax rules could help. For instance, if the limit for investing in a new house could be adjusted so that the Rs.10 crore limit only applies to second or third houses, not the first one, it would benefit taxpayers.
Also, increasing the deduction limit for housing loans from Rs.2 lakh to Rs.3 lakh or Rs.4 lakh would be helpful. Especially since current tax rates are high. We might expect lower interest rates in future, but it’s uncertain when that will happen. Allowing taxpayers to offset all housing property-related losses against other income instead of just Rs.2 lakh would also leave more money in their hands.
These changes would provide significant benefits to taxpayers. They could help stimulate the economy.
Q: The bigger argument is how does government broaden the tax base. Get more people under the tax umbrella. On that front what do you think government can do?
The economic data shows that the number of taxpayers has grown from 2 crore to 6.5 crore. Looking at the broader picture there might be around 25-30 crore people with disposable income. After excluding daily wage earners and contract workers, about 20-25 crore people could be in the tax net. Out of these 6.5 crore are currently paying taxes.
While expanding the tax base is still important, the situation has improved. This is compared to when there were only 2 crore taxpayers. To further expand the tax base the government could keep current tax slab rates. Increase the standard deduction. This approach would allow more people to come under the tax net without raising tax rates. It would encourage more people to file returns.
Another piece of data from income tax authorities shows that the percentage of taxpayers earning below Rs.5 lakh has decreased from 50% to 33%. This means more people have moved into higher tax brackets. The government should focus on ways to put more disposable income into people’s hands. This would further encourage tax compliance and boost the economy.
