Budget 2023: How Nirmala Sitharaman Can Help The Middle-Class Taxpayer
Aiding home ownership, affordable healthcare and increased tax deductions could be considered to help middle class households.
Finance Minister Nirmala Sitharaman's remark that she considers herself middle class and knows of their struggles has raised expectations from Budget 2023 from this group of taxpayers.
The government, Sitharaman said, had not imposed new taxes on those earning below Rs 5 lakh annually and had worked towards improving public infrastructure like building smart cities and the metro train network.
Measures to ease home ownership, affordable healthcare, and increased in tax deductions can be considered to alleviate the pressures on middle-class households.
Here's what tax experts have to say:
Raising Annual Basic Exemption Limit
The government has not changed the annual basic exemption limit of Rs 2.5 lakh for individual taxpayers below the age of 60 since fiscal 2015.
Given the numerous factors to contend with, like the increase in the cost of living, inflation, the number of taxpayers not required to file tax returns, the tax revenue foregone by the government, said Parizad Sirwalla, partner and national head of tax and global mobility services at KPMG in India.
The government may revisit the limit and raise the annual basic exemption limit to Rs 5 lakh from the existing Rs 2.5 lakh in the forthcoming budget under both the old and new tax regimes, Sirwalla said.
Sweeten New Tax Regime
The government introduced the new personal tax regime in 2020 to simplify the tax structure and encourage more compliance. The new policy envisioned more slabs at a progressive level with the absence of many popular deductions or exemptions such as the HRA exemption, interest on housing loans relating to a self-occupied property, and deductions under Section 80C, among others.
The government might think about making the tax regime more appealing to taxpayers and achieving its goal of simplicity by having one tax system so that taxpayers don't have to choose between two tax regimes, Amarpal S. Chadha, tax partner and India mobility leader at EY, told BQ Prime. This would increase the adoption rate among middle-income taxpayers, he said.
This includes retaining some of the exemptions and deductions under the new optional tax regime that were in the old regime. Sirwalla notes that the deductions to be retained can be on the premium paid on a medical insurance policy for self and family and the deduction for interest on a housing loan on a self-occupied property.
Rethink Allowed Deductions
The other long-pending expectation is the increase in the limit of deduction under section 80C of the Income-tax Act for eligible investments or expenditure, Radhika Viswanathan, executive director, Deloitte Haskins & Sells LLP, told BQ.
"Given that the coverage under this section includes contributions to the provident fund, life insurance premia, and repayment of housing loan principal, and the fact that the limit has remained at Rs 1.5 lakh for a long time, the government could consider increasing this limit to Rs 3 lakh," she said.
According to Chada of EY, the deductions could be specifically restricted to sections 80C/80CCC/80CCD(1)/(1B) and section 80D which includes provident fund (including PPF), and qualifying life insurance products, interest on a housing loan; pension policies; employee or self-contributions to a new pension scheme; and mediclaim insurance.
Revise Deduction For Interest On housing Loan
"Owning a home is a dream of almost every middle-class taxpayer and borrowings play an important role in making this a reality. Not only does it result in the creation of an asset, but it also gives tax relief in the form of a deduction for interest and principal repayment. However, the deduction limit for interest has remained constant at Rs 2 lakh since April 2015," said Viswanathan of Deloitte Haskins.
Further, the pre-construction interest should be separately deductible over and above the current year's interest, according to Ishita Sengupta, who is a partner at Vialto Partners.
"Currently, interest for the pre-construction period can be claimed over a period of 5 years in equal installments beginning from the year in which construction is completed," she said, "Such deduction is subsumed within the present cap of Rs 2 lakh along with the interest paid for the current year."
Revise Cap On House Property Loss
Along with raising the bar for interest on housing loans, Chada is also advocating that the amount allowed for set-off of house property loss against other heads in the same year, to be not restricted to the cap of Rs 2 lakh.
Raise Standard Deduction Limit
Tax-free medical reimbursements and travel allowance exemptions were withdrawn from FY 2018-19 by the introduction of the standard deduction.
"Keeping in mind the increased cost of living, there is a case in point to consider increasing the standard deduction from the existing limit of Rs 50,000 to Rs 1 lakh," Sirwalla said.
Other Possible Benefits
Health Insurance Premium Deduction
Sirwalla said there has been a significant increase in hospitalisation costs and medical expenditure, and the deduction for health insurance premiums, which is capped at Rs 25,000 (including preventive check-ups) for self, spouse, and dependent children may be enhanced to Rs 50,000.
The deduction stands at Rs 50,000 if parents are included, with at least one of them being a senior citizen. Sirwalla hopes this deduction may be enhanced to Rs 1 lakh too.
Medical Expenditure For Senior Citizens
Sengupta said it would be befitting to give additional deductions for out-patient-department expenses such as medical consultations, medical tests, physiotherapy, etc. This deduction should be available for those who incur these expenses for senior citizens.
Leave Travel Concession
As of now, tax relief is allowed for leave travel assistance for two journeys performed in a block of four calendar years, and it is restricted to economy-class airfare or first-class rail for traveling along with family to any place within India.
Sengupta says that this should be available every financial year and should include the cost of travel (airfare, train fare, etc.) and other costs like food and lodging.
This deduction was conditional on invoices subject to GST. "This will encourage taxpayers to go on holiday and give a boost to the Indian tourism industry while also contributing to the GST kitty," she said.
Rent Paid By Non-Salaried Taxpayers
A deduction to the extent of Rs 5,000 per month is allowed in respect of rent paid by an individual who is not in receipt of house rent allowance-- non-salaried taxpayers. Sengupta adds that this limit should be increased to Rs 20,000 per month to give benefits to non-salaried individuals who also pay rent.