Union Budget 2023: The Finance Ministry should simplify and rationalise personal tax laws

Taxpayers eagerly wait for the Union Budget each year in the hope of a reduction in tax rates or an increase in some deductions which will benefit them and help increase their savings. Let us look at some of the expectations around the simplification and rationalization of personal taxation from this Union Budget.

Rationalise Capital Gains taxation: Today, the taxation of capital gains is inconsistent in terms of holding periods or tax rates for different types of instruments. The indexation benefit varies in different situations and the tax rates are also different for resident and non-resident individuals. For instance, the holding period for listed shares to be considered long-term capital assets is more than 12 months whereas for unlisted shares it is 24 months. Further, the tax rates vary in the range of 10 per cent for listed equity shares to 20 per cent for unlisted equity shares. Also, while residents would be required to pay tax at 20 per cent on long-term capital gains on the sale of unlisted shares, non-residents could take advantage of lower tax rates under the domestic tax laws or the tax treaty under which they may not be required to pay any taxes in India. Considering these disparities, and the objective of spurring investments in India, it is expected that capital gains taxation will be reviewed and revisited to rationalize them.

Reduce maximum marginal personal tax rate: Currently, the maximum marginal personal tax rate in India is 42.744 per cent if the taxable income exceeds Rs 5 crores. The maximum income-tax rate is 30 per cent, clubbed with the surcharge at the highest rate of 37 per cent and education cess of 4 per cent bringing the tax rate to 42.744 per cent for the super-rich. To promote investments in India, and improve the economy, the government could consider reducing the maximum marginal tax rate for individuals.

Increase the limits for deductions: The existing limits for various deductions have been set several years ago and have remained the same. The deduction of Rs 1.5 lakhs under section 80C of the Income-tax Act, 1961 includes deduction towards payment of life insurance premium, contribution to public provident fund, recognized provident fund and Sukanya Samriddhi Yojana, tuition fees, repayment of housing loan amongst others. Hence, there is an expectation that this limit will be increased to Rs 2.5 lakhs in the current budget. Further, the limit on the deduction for interest on a housing loan for a self-occupied property is Rs 2 lakhs. While there was a slight decline in the interest rates in the interim, with the Reserve Bank of India increasing the Repo rates in an attempt to fight inflation, the interest on housing loans is also now higher. Further, the additional deduction of Rs 1.5 lakhs for interest on housing loans is subject to several conditions and is not available to all taxpayers. Hence, it is expected that this limit will be increased to at least Rs 3 lakhs to give some relief to taxpayers. The above revision in the limits is required both under the existing and concessional tax regimes to provide benefits to the taxpayers and also make the concessional tax regime more attractive.

Remove the cap of Rs 2 lakhs towards the set-off of house property loss against other heads in the same year: At present, the tax laws limit the set-off of loss from let-out house property against other heads of income in the same year at Rs 2 lakhs. This limit for let-out house property was introduced with effect from the financial year 2017-18 to bring in parity with the deduction allowed for self-occupied house property. Earlier, there was no limit on the loss that could be set off for a let-out house property. Now, the remaining loss of more than Rs 2 lakhs can be carried forward for the next eight years and set off against income from house property. However, in cases where the interest on the housing loan exceeds the rent received by the taxpayers or in case of a self-occupied house property, carrying forward the unadjusted losses of the earlier years will derive no benefit to the taxpayers. Thus, it is expected that the government will consider the hardship caused due to this and review the existing limit for set-off.

Provide tax relief/rebate for employees working under a hybrid model: With a hybrid working model becoming the norm, there are additional expenses that employees incur such as setting up a home office like chairs and desks, high-speed internet connection, ensuring power back-up, purchase of electronic accessories to maintain efficiency. Also, the employees will have to incur higher electricity, telephone and internet bills due to increased usage. All these expenses would not have been incurred if the employees were not working from home. Employees do not have the option to claim a tax deduction for expenses incurred by them, unlike self-employed professionals. Governments of other countries like the UK and Canada have provided deductions for expenses incurred by employees while working from home. Considering this and the possibility that the hybrid working model is here to stay, the government could look at introducing tax relief or some rebate for employees working from home.

These are some of the key measures that the government could consider for simplifying and rationalizing the personal tax laws in the upcoming Union Budget. However, as this is the last full budget before the general elections, one will have to wait and watch, to see what changes the government will bring into personal tax laws.

(views expressed are personal. The author is Tax Partner and India Mobility leader, EY. Ammu Sadanandhan, Director, People Advisory Services, EY India also contributed to the article.)

Also Read: Budget 2023 may bring tax parity in capital gains on listed and unlisted equities