Clarity, more tax sops: Will Modi 3.0 maiden Budget make taxpayers smile?

Many like him have demanded that the government ensure parity between the two regimes. They want the comforts of the old, with its many deductions, but with the lower slab rates of the new. And they’re pinning their hopes on the upcoming Union Budget for the full year 2024–25—an Interim Budget was presented earlier this year ahead of the General Elections according to convention.

The National Democratic Alliance government is back in the saddle. Union Finance Minister Nirmala Sitharaman has retained her portfolio, and she is set to present a record seventh Budget.

But despite the continuity, experts expect tweaks considering the changed composition of the Lok Sabha, with the Bharatiya Janata Party falling below the majority mark of 272 seats and depending on coalition partners to make up the numbers.

They believe the government will likely retain both regimes, but it might make changes to and observe which one gains momentum over time. As of the past year, only 15% of taxpayers had shifted to the new regime, according to tax services portal ClearTax.

Slab Dabble

A persistent complaint of taxpayers in recent years is the rates under the old tax regime remaining unchanged since FY18. Prabhakar K.S., Founder and CEO of tax consultancy Shree Tax Chambers, anticipates a revision of the tax slabs and rates under both regimes as the government seeks to provide much-needed relief to the middle class, particularly salaried employees.

He says under the old regime, the basic exemption limit, below which no income tax is levied, could be raised to `8 lakh. From Rs 8 lakh to Rs 15 lakh a rate of 10% can be imposed, 20% between Rs 15 lakh and Rs 25 lakh, and 30% for income above Rs 25 lakh.

In the case of the new tax regime, which was made the default in the Union Budget 2023–24, Prabhakar says four years after its introduction this is the right time to tinker with it. He says the government can provide attractive tax slabs and rates to compel more taxpayers to choose it. Prabhakar says, ideally, under the new regime, no tax should be levied for income up to Rs 8 lakh. For income between Rs 8 lakh and Rs 12.5 lakh, he suggests a rate of 10%, 20% for income between Rs 12.5 lakh and Rs 20 lakh, 25% for Rs 20–25 lakh, and 30% for those who earn above Rs 25 lakh.

This will reduce the compliance burden and address concerns about the disparity between personal and corporate tax rates, he says. “In addition, our tax regime will be on par with regions like Hong Kong, Singapore, and Malaysia,” says Prabhakar.

It’s not that the government hasn’t made efforts to make the new tax regime more attractive. The minister introduced a standard deduction and raised the exemption threshold, but it has had limited impact.

“If slabs change, the finance ministry will likely increase the standard deduction limit to `75,000 from `50,000 under both regimes,” says Prabhakar. Additionally, overall deduction limits—permitted in the old regime under sections 80C, 80D, and 80TTA of the Income Tax Act—should also see an increase.

Adithya Reddy, Senior Associate at professional services firm PwC, says deductions in lieu of medical insurance premium payments can be introduced in the new regime. “Since Section 80D deduction for medical premiums is only allowed under the old regime, it would be very beneficial if it were included under the new one as well and the limit of the deduction was increased,” he adds.

Another sticking point is the lack of change in the exemption limit under Section 80C for some years. Under the old regime, this section allows taxpayers to claim deductions for investments and expenses up to Rs 1.5 lakh. It is not available under the new regime.

IT professional Harsh urges the government to reconsider this in light of the high rates of inflation in recent years. “The limits of certain tax-related sections for deduction (like 80C) should increase,” says the 31-year-old.

Some like Shikhar Srivastava, Founder of advertising agency Ascope Advertising, have called for more sops for the self-employed. “Balancing salaries, rent, and direct and indirect taxes, we also face the constant pressure of monthly GST filing and investments to reduce our tax burden. The GST and tax regimes have forced us to rely more on chartered accountants, adding an extra financial burden. This is not just about numbers; it’s about the survival of our businesses.”

Home Comforts

In the old regime, taxpayers can claim deductions up to Rs 2 lakh for interest repayment on home loans under Section 24(b) of the I-T Act. But with real estate prices shooting through the roof, especially in metro cities, that limit is proving inadequate. “Since prices are rising constantly, this restricts the buyer’s ability to acquire property, thereby also increasing the interest payments on home loans. Therefore, the deduction amount might see an increase,” says Reddy.

Archit Gupta, Founder and CEO of ClearTax, backs such an increase. “This change would provide additional incentives for purchasing residential properties, supporting both individual financial health and the real estate market,” he says. Besides, there are some anomalies that need urgent attention. For example, says Gupta, the reclassification of Bengaluru as a metro city to align house rent allowance deductions with other major cities. The current non-metro classification limits HRA deductions to 40%, compared to 50% available in metros.

Affordable housing is a priority for the new government, as was evident from its decision to assist in the construction of houses for an additional 30 million rural and urban households under its flagship Pradhan Mantri Awas Yojana (PMAY). This decision was taken at the very first meeting of the Union Cabinet on June 10.

After the pandemic, there has been a spike in demand for residential homes in metros and Tier II and III cities. Hence, experts expect deductions under Section 80EEA of the I-T Act to be extended up to March 31, 2029. It was set to expire this year.

“There might be enhancements or introductions in tax benefits similar to Section 80EEA, which offers a deduction of `1.5 lakh on home loan interest aimed at affordable housing. However, this new section should have an enhanced limit. Affordable housing no longer costs Rs 45 lakh, and this revision is inevitable,” says Gupta.

Aarti Raote, Partner at Deloitte India, agrees that taxpayers can expect some relief, like simplified tax laws and the removal of processing hurdles. “Large-scale tax sops or added deductions may not be likely, but it is expected that the deduction under Section 80EEA will be extended,” she says.

Investors also expect favourable changes to capital gains tax under the old regime, including potential adjustments to thresholds or rates. “Currently, long-term capital gains tax on equity is levied at the rate of 10% above `1 lakh, while LTCG on immovable property is taxed at 20% with indexation benefits. Aligning and reducing these rates could simplify and promote fairness in the tax system,” says a private sector employee who did not wish to be named.

One Form to Rule Them All

The government may introduce a common Income Tax Return (ITR) form to simplify filing for individuals.

Prabhakar says in November 2022, the Central Board of Direct Taxes (CBDT) sought stakeholders’ comments on the proposed common ITR by merging all existing ITRs, except the ITR-7 that is applicable to charitable trusts. “No doubt, this will make it easier to reconcile the constantly flowing terabyte size of data obtained from third parties, like banks, financial institutions, and other sources while processing the filed returns,” he says. But there has been no movement since. “Hopefully, the department will introduce it in the assessment year 2025–26.”

Elsewhere, the government may continue its focus on improving taxpayer services, with increased focus on the integration of e-services in the filing of returns.

“Going by past trends, the government will continue with its objectives of ‘ease of doing business’ and simplification of tax laws. Thus, it is expected that the tax provisions will be simplified and the administrative bottlenecks will be removed,” says Deloitte’s Raote.

One initiative of note in this regard is the modernisation of the Annual Information Statement (AIS) to allow taxpayers to share feedback and help verify data before filing returns.

The expectations are many. Given the new government’s emphasis on boosting consumption, those expectations may be fulfilled to some extent in the Budget.

@imNavneetDubey