Union Budget 2024: What’s new on the Income Tax front for Taxpayers

Union Budget 2024: What’s new on the Income Tax front for Taxpayers

Kakali Das

The Indian government is scheduled to announce its 2024 Union Budget on July 23^rd. Over 93.7 million taxpayers across the country are eagerly anticipating potential tax relief or incentives from this budget.

This budget is notable for its uniqueness in several aspects. Typically, India presents its annual budget on February 1^st, but this year saw a departure from the norm. The Narendra Modi government presented an interim budget in February, allocating funds solely for the first quarter of FY 2024-2025.

This adjustment was due to India scheduling its general election from April 19^th to June 1^st. With the elections concluded and Prime Minister Modi’s National Democratic Alliance forming a government for the third consecutive term, Finance Minister Nirmala Sitharaman is set to present the full-year budget for 2024-2025. This marks Sitharaman’s seventh presentation of India’s annual financial statement.

While there are many expectations from the budget, the most eagerly awaited aspect is the Income Tax provisions. In the interim budget, the Finance Minister opted to maintain the status quo. Sitharaman argued that the interim budget was not the appropriate time for revising tax slabs. Therefore, taxpayers are now hoping for some changes in the upcoming budget.

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Speculations, demands, and expectations regarding Income Tax in Budget 2024 are running high. But before understanding what Indian taxpayers are hoping for, let’s first examine the New Tax Regime.

India’s Twin Tax Regime

India operates under a dual income tax regime. One regime provides exemptions and deductions at higher tax rates, while the other offers lower tax rates with fewer exemptions and deductions.

The new tax regime, introduced by Finance Minister Nirmala Sitharaman in 2020, aimed to provide taxpayers with more financial flexibility. Unlike the old scheme, which incentivized savings through tax deductions, the new regime simplifies taxes by lowering rates without offering deductions. This scheme underwent additional revisions in the 2023 budget.

Currently, Indians have the option to choose between the two regimes. However, if taxpayers do not make a choice, the new tax regime automatically applies.

Under the old tax regime, individuals with annual incomes up to ₹5 lakh are exempt from paying taxes. Those earning above this threshold are taxed according to a specific rate structure, which starts from 5% and goes up to 30%.

Under the old tax regime, individuals can reduce their taxable income by opting for various exemptions and deductions. These deductions are provided to encourage savings in areas such as insurance, pension contributions, and housing mortgages, among others. With these deductions, individuals can earn up to ₹10 lakh without incurring any tax liability.

However, these deductions are not available under the new tax regime. Under this regime, individuals earning up to ₹7 lakh annually are exempt from paying taxes. Income above this threshold is taxed across five slabs, with rates starting at 5 percent.

Standard Deduction Rate

Interestingly, both tax regimes share a common feature—a standard deduction of ₹50,000. This exemption, which does not require any investment proof, was first introduced in 2018 and later increased to ₹50,000 in 2019. It has remained unchanged since then.

There has been a longstanding demand to increase this deduction in line with inflation. Some experts speculate that the government may raise the standard deduction to ₹1 lakh. Such an increase would offer substantial tax relief, particularly benefiting fixed-income groups such as pensioners. A higher standard deduction would effectively boost disposable income, especially for lower and middle-income earners.

While increasing the standard deduction is one way to enhance disposable income, another approach is to raise the basic income tax exemption limit. This limit represents the threshold below which no income tax is levied on an individual’s earnings and determines when income tax becomes applicable.

As of now, the basic income tax exemption limit stands at ₹3 lakh. Indian citizens earning up to ₹3 lakh annually do not have to pay any tax. According to reports, the Modi government may increase this limit to ₹5 lakh. While this change may not significantly impact those earning below ₹7.5 lakh, individuals earning more than this can expect a lower tax liability.

Reports indicate that if the government proceeds with this move, taxes could be reduced by up to ₹10,400.

“Currently, the basic exemption limit is of ₹3 lakhs in the new tax regime. And, many employees still prefer the old tax regime for the benefits like HRA and deductions under section 80C. If the government raises this limit to ₹5 lakhs across both the regimes, it would mean individuals earning up to ₹5 lakhs annually would not have to pay any income tax. So this tax move would put more disposable income in the hands of a taxpayer allowing them to save more and spend on the essential needs which can overall boost the economy.” – Chakravarthy V.,Co-founder & Director, Prime Wealth Finserv Pvt Ltd.

Rationalisation Of Capital Gains Tax

One of the other highly anticipated changes expected in Budget 2024 is related to Capital Gains Tax. This tax is levied on the profit earned when an individual sells assets such as gold, real estate, stocks, or mutual funds.

Capital gain tax is the tax that an individual taxpayer or any taxpayer incurs upon selling a specific capital asset. Simply put, if a taxpayer purchases an asset at a certain cost and sells it at a higher price, the difference between the selling price and the cost price constitutes a capital gain. This gain can be categorized as short-term or long-term depending on the holding period of the asset, which varies across different asset classes—ranging from 12 months to 3 years.

Let’s understand this with an example! Currently, if an Indian sells gold within 3 years of buying it, any profit is added to their income and taxed according to their income tax slab. However, if the gold is held for more than 3 years, the profit is taxed at a rate of 20%.

While this principle applies to gold, the tax rate and treatment of capital gains vary based on factors such as the type of asset and the duration of ownership. This variability has led to confusion among investors.

The tax rates applied to different types of capital assets can be very complex and confusing for ordinary taxpayers. For instance, long-term listed equity shares are taxed at 10 percent after certain deductions, while long-term unlisted equity shares are taxed at 20 percent.

Therefore, there is certainly a need to overhaul the capital gains tax structure to simplify compliance for taxpayers.

These are just a few of the fundamental and widely discussed expectations that the Indian middle class has for Budget 2024. With the last budget maintaining the status quo, taxpayers are eagerly anticipating the first budget of the Modi 3.0 government.

The wish list is extensive and varied. Experts argue that in a country like India, where economic growth exceeded expectations last year, new tax breaks could serve as a catalyst for further growth across all sectors of society. This has the potential to boost disposable income, enabling the middle class to fulfill their aspirations and manage their finances effectively.

However, whether these demands or wishes will be fulfilled remains to be seen until July 23^rd.

16-07-2024

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