Union Budget 2024: What all can FM Sitharaman offer on the income tax front for taxpayers

Budget 2024: Finance Minister Nirmala Sitharaman will be presenting the Union Budget for 2024-25 later this month. Since the beginning of this year, taxpayers have been expecting some relief and concession on the tax front. But were disappointed in the Interim Budget as the finance minister proposed to retain the same tax rates for both direct and indirect taxes, including import duties. She also maintained the status quo on the capital gains structure, opting not to introduce any changes.

In an exclusive interview with Business Today TV, FM Sitharaman said the Interim Budget 2024 wasn’t the time for her to take a call on income tax rebate or revision of tax slabs.

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Despite the rapid economic growth of India, the growth of per capita income within the vast middle-income group, which is mainly comprised of salaried individuals, has been slow. This disparity has caused a slowdown in private consumption, which is essential for economic growth. 

Experts suggest that providing tax relief to salaried taxpayers could stimulate increased spending and ultimately boost consumption. The finance ministry sources have indicated that the government is contemplating tax relief measures, with a final decision expected just before the budget presentation. The rising cost of living in India is another factor prompting the government to consider these tax relief measures.

Here’s what taxpayers and experts expecting on the tax front

1. Standard Deduction for New Tax Regime: The Finance Ministry is reportedly exploring the possibility of increasing the standard deduction threshold for income taxpayers in the new regime, while maintaining the tax exemption-heavy structure of the old regime.

In Budget 2018, the standard deduction for salaried individuals was reinstated at Rs 40,000 per year, replacing the previous deductions for travel allowance (Rs 19,200) and medical expenses (Rs 15,000) annually. The interim budget of 2019 saw an increase in the standard deduction limit to Rs 50,000. It has been suggested that the government should explore the possibility of introducing an indexed standard deduction mechanism, similar to capital gains provisions, to ensure that the standard deduction keeps pace with inflation for employees.
2. Simplification of income tax regime: Accounting company EY (Ernst & Young) has said the NDA government might streamline tax slabs and reduce rates to provide relief to individual taxpayers. Currently, the tax rates under the new regime range between 5-30%, depending on income levels.

3. NPS taxation: The clarification of the taxation rules regarding employer contributions exceeding Rs 7.5 lakh to specified funds such as superannuation and NPS (National Pension System) is being actively pursued. The correct definitions of ‘accretions’ and the methods used for computing them are crucial aspects that require clarity and further elaboration.

4.  Exemption limit under the new tax regime: Deloitte India has pointed out that the Union Budget 2023 brought about notable modifications to the tax slabs of the new personal tax regime. This includes raising the basic exemption limit from Rs 2.5 lakh to Rs 3 lakh and decreasing the surcharge for individuals earning over Rs 5 crore from 37% to 25%. These adjustments were implemented to enhance the attractiveness of the new tax regime. However, the tax rates for the old tax regime have remained unaltered. Therefore, there is a critical requirement for a substantial enhancement in the structure of the old income tax regime slabs.

5. ESOPs taxation: A proposal is being made to extend tax deferral benefits to the point of sale for all employers, not restricted to eligible startups as currently practiced.

6. Tweak in HRA rates: Following a significant increase in rental rates in major Indian cities post-pandemic, it has become necessary to review the House Rent Allowance (HRA) deductions. With a year-on-year growth of over 30% in 2023, cities like Bengaluru, Hyderabad, Pune, and Gurugram are now commanding premium rents due to the resurgence in office activities and adoption of hybrid work models.

Typically constituting 20-30% of an employee’s total compensation, the HRA component plays a crucial role in their financial planning. Currently, the exemption for HRA is based on the lower of 50% or 40% of the basic salary (depending on city category), actual HRA received, or actual rent paid in excess of 10% of the basic salary as per section 10(13A). While 50% of basic salary is allowed for a few major cities, others are limited to 40%.

It is essential to consider adjusting the HRA rates in line with the prevailing rental market trends to ensure fair compensation for employees residing in high-rent areas.

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