Ordinary taxpayers hope for a reduction in personal tax rates in this year’s budget as the current taxes are “exceptionally high” compared to other countries, say most experts.
Rates should be rationalised so there is fairness in structuring decisions and in line with corporate tax, says Vivek Jalan, partner of Tax Connect Advisory, a tax consultancy firm.
Individual personal tax rates are “exceptionally high” in India compared to other countries. Moreover, the gap between individual and corporate taxes has widened because of the reduction in corporate taxes a few years ago.
A recent BankBazaar survey has highlighted that the income tax slabs must catch up with inflation and need revision. For example, what was Rs 100 some 10 years ago now equals Rs 150, highlighting the rising inflation cost.
While this has not affected those earning Rs 5 lakh or less, it adversely impacted people in the 20 per cent and 30 per cent tax brackets. These slabs were last enhanced in 2013-14.
Those in the 20 per cent and 30 per cent tax brackets are paying more tax in real terms due to inflation. So someone with an income of Rs 60 lakh is effectively paying 50 per cent tax, although the tax rate is 30 per cent.
Data from Tax Connect shows that the highest marginal tax rate for individuals has gone up to 42.74 per cent (highest slab) against the normal corporate tax rate of 25.17 per cent.
In contrast, it is 15 per cent in Hongkong, 18 per cent in Sri Lanka, 25 per cent in Bangladesh, and 25 per cent in Singapore.
Also, while the maximum deduction under section 80C of the Income Tax Act is Rs 1.5 lakh, it is inadequate even if one calculates annual inflation at just 6 per cent. Jalan says it should be at least Rs 2.5 lakh. This, he said, would boost investments and savings.
Agrees Shailendra Kumar, chairman of TIOL Knowledge Foundation, a fiscal think tank. He says limits to various deductions should be enhanced. “Given the sluggish growth in the housing sector, the limit of Rs 2 lakh on home loan interest should be raised to Rs 3 lakh.” It will be a two-fold relief to salaried voters and real estate that accounts for 8 per cent of GDP.
The gross national savings dropped from 37 percent to 27 per cent, so there is a need to expand the perimeter of Sec 80C to Rs 2.5 lakh. Kumar says this will put more money in the hands of the government to bankroll the infrastructure sector or higher capex.
In addition, a complete overhaul of the capital gains regime is overdue. The Income Tax Act of 1961 needs to provide a level-playing treatment for different assets. Section 80D limit should also be hiked to Rs 40,000, Kumar adds.
Other tax experts like Col. Sanjeev Govila, CEO of Hum Fauji Initiatives, suggest raising the deductions limit in line with inflation. He points out that deduction under 80C covers a vast gamut of categories, from the public provident fund (PPF), equity-linked savings schemes (ELSS), national savings certificate (NSC), national pension scheme (NPS), and Sukanya
Samriddhi Yojana (SSY) to life insurance policies , tuition fees, etc. However, it is the “only section available to everybody for saving some tax.
Govila says that “even after increasing it to Rs 3 lakh, a major part of one’s investments in these instruments for a middle-income person remain taxable.” The 80C limit was last revised from Rs 1 lakh to Rs 1.5 lakh in FY 2014-15 when the Cost Inflation Index (CII) was 240. Govila argues that “it is now 331 and considering current inflation only at 6 per cent, it comes out to about 351 for the next financial year, for which this increase is being discussed. With that, the current limit should be about Rs 2.19 lakh. However, considering the government takes an unduly long time to revise this limit, it should go to at least Rs 2.5 lakh, preferably to Rs 3 lakh.”
V. Swaminathan, executive chairman of Andromeda Loans and Apnapaisa, says, “the Reserve Bank of India (RBI) has hiked the policy rate by 225 basis points since May 2022, and we may expect it to increase the policy rates a few times in 2023 as well. However, with the Union Budget 2023 around the corner, the government may introduce conducive measures to relieve borrowers. Hopefully, the government will consider the long-pending demand to enhance the deduction against home loan interest from Rs 2 lakh to Rs 3 lakh.”
