Countdown to the India Union Budget 2024
Vol 1: Individual Tax

With the India Union Budget 2024 around the corner, BDO India is pleased to present the expectations from the first Budget of the new Government, in our Pre-Budget campaign: Countdown to the India Union Budget 2024 (a two-volume series). Volume 1: Individual Tax

The Union Budget 2024 is slated to be announced on 23 July 2024 and will be the Finance Minister Nirmala Sitharaman’s seventh consecutive Budget. The Government is expected to announce several major economic and social reforms in this year’s Budget.

For an extended period, citizens have been demanding incentives and certain relief from taxes. Listed here are a few such expectations which, if considered in this year’s Budget, will have a positive impact on individual taxpayers.

    • Rationalisation of tax rates and exemptions

The Government has tried to simplify the tax structure by introducing a new tax regime that offers a lower rate of tax, but in exchange, the taxpayers are required to forego several exemptions and deductions.

Under the new tax regime, income starting at INR 3 lakh is taxable @5%, but this rate escalates sharply to 30% at the mere income level of INR 15 lakh. Such a sharp increase in tax rates does seem excessive and needs rationalisation. It is expected that the Government revise the thresholds at which higher tax rates apply and bring the applicable tax rate on income of INR 15 lakh down to 22-25%.

Individual taxpayers further expect the Government to increase the basic tax exemption limit from INR 2.5 lakh under the old tax regime / INR 3 lakh under the new tax regime to INR 5 lakh.

As per Section 10 (13A) of the Income-Tax Act, 1961 (the IT Act) read with Rule 2A of the Income Tax Rules, 1962 (the IT Rules), if the taxpayer is staying in a ‘metro city’, they can consider 50% of their defined salary for computation of the amount of House Rent Allowance (HRA) exempt from tax. However, if a person is staying in a non-metro city, the exemption is limited to 40% of the defined salary.   

Currently, only Chennai, Mumbai, Delhi and Kolkata qualify as ‘metro city’ for this purpose. It’s been a long-standing expectation from individuals to revise the classification of ‘metro city’ under HRA exemption to include cities like Bengaluru, Hyderabad, Gurgaon, Pune, etc., in the category, as the cost of living in such cities is at par with the currently identified four metro cities.

For salaried individuals, the standard deduction of INR 40,000 was introduced in 2018 under Section 16(ia) of the IT Act. This standard deduction was introduced in lieu of deductions for transport allowance and medical expense reimbursement. In 2019, this amount was increased to INR 50,000. Amidst the escalating living expenses, individuals expect the same to be raised to INR 75,000. 

Currently, under Section 17(2)(viii) read with Rule 3(7)(iii), any meal/ meal coupon provided by the employer with a value up to INR 50 per meal is exempt from tax. Given the rising inflation, the exemption limit of INR 50 per meal is insufficient.

Further, Section 10(14)(ii) read with Rules 2BB(2)(5) and 2BB(2)(6), provides an exemption from tax, amounting to INR 100 per month per child and INR 300 per month per child, against the amount paid by the Employee for Children’s Education and Hostel Allowance respectively.

Given today’s market situation and the rising cost of living, these amounts are insufficient to cover the actual expenses for food, children’s education or hostel expenses, leading to no or very minimal tax savings in the hands of the employees. It is expected that the per meal value be increased to INR 100 and the amount of deduction towards education and hostel allowance be increased to at least INR 1,000 and INR 1,500 per month per child, respectively.

    • Simplifying the computation of taxable income
       

The Indian Government unveiled the first draft of the Direct Tax Code (DTC) in August 2009. The Direct Tax Code Bill, 2010 (Bill) was introduced in the Lok Sabha and various modifications were recommended by the Standing Committee during the years 2011 to 2013. Despite these efforts, the Bill faced numerous hurdles and delays due to various political and economic barriers.

The DTC aims to overhaul the tax system comprehensively by providing a more transparent, equitable, and sustainable tax structure, aligning the Indian tax systems with international best practices, and promoting long-term economic growth, sustainability and stability.

While the new tax regime simplifies taxation by offering lower tax rates with fewer or no exemptions/ deductions, it does not address the systemic complexities and inefficiencies present in the current tax framework. Further, the coexistence of old and new tax regimes increases the complexities for individual taxpayers.

A few of the simplification mechanics have now become a long-term expectation of the individuals which need to be addressed promptly:

The Indian Government’s transition plan to implement one regime of taxation should include stakeholder consultations, gradual phasing out of exemptions, reduced tax rates, broadening of the tax base, and public awareness campaigns; beginning with legislative amendments to consolidate the old and new regimes, followed by a clear timeline for implementation.

Capital gain taxation has long been a very confusing structure for individual taxpayers. Individuals expect the Government to simplify, rationalise and harmonise the time-based classification done for types of capital assets, used to differentiate short-term capital gains (STCG) with long-term capital gains (LTCG) in the upcoming Union Budget.

There are varied tax rates for taxation of capital gain from various types of assets coupled with the variation in taxation for some types of assets on the basis of residential status as well, which creates more confusion.

In this Budget, we expect the Government to introduce parity for varied classes of assets in terms of tax rates and the holding period.

    • Changes to incentivise certain investments

To promote savings towards retirement, the Government may consider allowing a higher limit for investment in the Public Provident Fund and National Pension Scheme to claim deduction under section 80C of the IT Act. Further, such deductions should also be allowed under the new tax regime.

Currently, a deduction of up to INR 1.5 lakh is allowed under Section 80EEB of the IT Act on account of interest paid on a loan taken to purchase Electric Vehicles (EV) provided such loan is availed on or before 31 March 2023. Given the Government’s agenda to promote green energy, this provision should be reintroduced under both new and old tax regimes.

Currently, a deduction of up to INR 2 lakh is allowed under section 24(b) of the IT Act for interest paid on a home loan. With the rising interest rates and house property costs, this current limit barely covers the amount of actual yearly interest paid by an individual. The increase in the limit from INR 2 lakh to INR 3 lakh will help in meeting the goal of making a house accessible to all.

    • Improve taxpayers’ experience

Foreign National individuals working in India are required to file an application to obtain a No Objection Certificate (NOC) from the Revenue Authorities before their departure. For long, this process has been manual, providing room for the personal bias of each jurisdictional officer. It is expected that the process of obtaining an NOC be streamlined and completely automated with a time limitation applicable to the authorities for processing it. 

Currently, tax payments in India are accepted in modes such as net banking, debit cards, NEFT/ RTGS, over-the-bank counter, and through UPI. However, these are possible only with Indian Banks, which makes it difficult for a non-resident taxpayer to make tax payments. Non-resident taxpayers would be benefitted if they were allowed to make tax payments from their overseas bank accounts.

Further, many foreign nationals leave India after closing their Indian bank accounts with pending tax refunds. At present, tax refunds are only payable to pre-validated Indian bank accounts. To alleviate this difficulty, foreign bank accounts should be considered for tax refunds in the case of PAN holders registered as non-residents or foreign nationals.

Conclusion

As we await the unveiling of the Union Budget 2024, the expectations are high, the Government is challenged with the task of balancing fiscal prudence with the need for economic stimulus. With global uncertainties and domestic demands both clamouring for attention, the Budget's formulation will require a delicate blend of strategic foresight and practical policymaking.

As we look forward to the Budget, it is crucial to maintain a realistic perspective while holding on to a sense of optimism. The decisions made in this Budget will play a pivotal role in shaping the nation's economic trajectory, impacting citizens across the country.

In this light, the Union Budget 2024 is not only a financial document but also a roadmap for India's future, charting the course towards a more prosperous and equitable society.

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