Expected Impact of Budget 2023 on Personal Tax: There are more than 80 million taxpayers in India, and salaried employees are the biggest contributors to taxes. The following are the expectations on the personal tax space from the FM:
1. Changes in Valuation u/s 17(2) of Company Owned Accommodation – The taxable value of residential accommodation owned by a company and provided to its employees is taken @ 15%/10%/7.5% of “Salary” in cities having different levels of population. Hence, for the same employee staying in the same company-owned accommodation, the perquisite value will increase with every salary increase. This is a demotivating factor for employees and hence, it is suggested that in case of company-owned accommodation, the concept of fair value should be introduced for the purpose of determining perquisite value, so as to ensure that the employee is taxed on the right value of this perquisite. Fair Value should be defined as the comparable rent in the location concerned.
2. Leave Travel Concession/Assistance u/s 10(5)
To boost the travel and tourism industry, tax relief may be given yearly and should apply to both domestic and international trips. In addition to travel expenses, tax relief should be expanded to include lodging costs as well.
3. Exemption from tax for payment of Leave Encashment to be raised to Rs 10 lakh
Since the last 21 years, the exemption limit for payment of leave encashment under Section 10(10AA) of the Act has only been Rs 3 lakh; this amount needs to be significantly increased with immediate effect.
4. Contribution to National Pension System (NPS) – At present the voluntary contribution of Rs 50,000 is allowed as a deduction u/s 80CCD (1B) of the Act. It should be raised to at least Rs 1 lakh.
5. Rationalization of tax rate for income of dividend earned by residents – With the abolition of Dividend Distribution Tax (DDT) by the Finance Act 2020, dividend is now taxed in the hands of shareholders at applicable slab rate. Accordingly, the Dividend tax could go upto 43% for residents, which for non-residents is only 28.5%. Like NRIs, for residents also dividends may now be taxed at a lower rate.
6. When compared to other nations, India’s high personal tax rate for individuals stands out as an extraordinarily high rate. The maximum personal income rates, for instance, are 15% in Hong Kong, 18% in Sri Lanka, 25% in Bangladesh, and 22% in Singapore. The middle class and those who make a living from wages suffer the most from high income taxes.
Additionally, the greatest marginal rate for individuals has increased to about 43%. (highest slab). Compared to corporations, where it is approximately 29% Equity demands that there should be at least some level of parity. In light of this budget, the finance minister might:
a. Increasing the basic income tax exemption limit from Rs 2.5 lakh for individual taxpayers to Rs 3.5 Lakh
b. Enhancing the standard deduction of Rs 50,000 to around Rs 75,000, rendering some tax relief to the country’s middle-class population.
7. Despite the introduction of a new tax system, the majority of taxpayers have not adopted it since it is less viable than the previous system. Hence it is expected that a new ‘hybrid system’ combining the new and old scheme would be introduced and the highest slab of income tax of 30% which starts at Rs.10 Lakh could also be enhanced to at least Rs. 15 Lakh.
8. Further, The Finance (No.2) Act, 2014 had fixed an overall limit to Rs. 1.5 lakh in respect of deduction under section 80C of the Act. Even if we consider an inflation of 6% per annum, the deduction needs to increase to at least Rs 2.5 lakh. These reliefs would incentivise savings and investments too.
9. The next major demand from consumers is an increase in the medical and health insurance u/s 80D rebate due to rising healthcare expenses and inflation worries that are having an impact on household incomes. It is anticipated that the limit will rise by at least 50%.
10. The housing loan interest deduction cap is around Rs 2 lakh. It is anticipated that the limit should be raised to at least Rs 3 lakh in response to the increase in interest rates.