Its just a few hours away for the Union Budget 2020. Individual tax payers are eagerly awaiting with bated breath in anticipation of a possible tax rate cut by Finance Minister, Nirmala Sitharaman.

Basic Exemption Limit To Be Revised

The previous Budget, brought smiles on the faces of the salaried class when the basic exemption limit was increased from Rs 2,00,000 to Rs 2,50,000. Since then, income thresholds have not been revised. Restoring standard deduction for salaried class employees and reduction in tax rates from 10 per cent to 5 per cent for the lowest income slabs, were some of the positive changes. However, these hardly impacted the higher income group. The Finance Act 2019 has levied additional surcharge up to 37 per cent on the super-rich class, which severely reduced their disposal income and led to a substantial impact on their investment decisions.

The previous year, the government introduced structural changes such as reduction in corporate tax rates and aids for start-ups with an aim to uplift the economy, with expectations that changes to the personal income tax rates would also follow.

India’s Gross Domestic Product (GDP), which was 8.17 per cent in FY 2016-17, has been steadily falling and has dipped to less than 7 per cent in 2019, due to internal factors such as impact from implementation of GST reforms and financial sector crisis. These were further fuelled by external factors such as the global economic slowdown and trade conflicts between the largest economies, among others. The slowdown in investment and consumer demand has derailed the economy.

Therefore, the government should tweak the existing tax structure. It should ideally increase the threshold exemption limit from Rs 250,000 to Rs 800,000. Thereafter, tax rates between 5 and15 per cent be imposed for incomes up to Rs 15 lakh and a 30 per cent tax rate could be levied for incomes beyond that.

Some Additional Measures

In addition to tax rate reduction, the government can look at some more deduction or exemption limits that will benefit the tax payers as listed below:

• To entail higher participation in medical schemes, increasing the medical benefit for self and family from Rs 25,000 to Rs 50,000 under section 80D, making it parallel with that for senior citizens;
• Enhancing the threshold limit of children education and hostel allowance from Rs 100/300 per month to Rs 2000/4000 per month respectively, keeping in mind the enormous cost of education in India;
• To give a boost to the real estate sector, increase the interest paid on housing loan deduction limit from Rs 200,000 to Rs 250,000;
• Enhancing the limit of investment in tax-saving instruments from Rs 150,000 to Rs 200,000, with additional relief for New Pension Scheme from Rs 50,000 to Rs 100,000;
• Increase in the threshold of taxing the long-term capital gain on equity shares, units of equity-oriented mutual fund and the units of business trust from Rs 100,000 to Rs 3,00,000;
• Extending the relief of saving bank interest to FD bank interest, post office schemes and other such schemes for general category and increasing the threshold from Rs 10,000 to Rs 50,000, bringing it at par with that for senior citizens.

The above changes will not only benefit taxpayers but would also help in fuelling investments. While tax reforms is a small step that will result in more disposal income in the hands of the tax payers, the government would need to introduce more comprehensive measures to improve the economy.

The government needs to match the expectations of people, keeping in mind the challenges to the exchequer!

Let’s wait and watch till the final outcome is pronounced on 1 February 2020!

Aarti Raote is Partner, Deloitte India

Vibha Bhaskar is Manager with Deloitte Haskins and Sells LLP