Will the budget for 2023 give salaried taxpayers some hope?

As February 1 draws nearer, we start to see wish lists from various social groups. The voice of the salaried class, which aspires for tax breaks and rate reductions from the Union Minister of Finance, is heard among the demands from various industry associations, investment groups, and companies.

Pay cuts, layoffs, inflation, as well as increased medical costs, have made the last couple of years quite difficult for taxpayers. As a result, just like every year, the taxpayer hopes that this year’s Union Budget would bring forth some much-needed tax reductions.

Some Common Expectations From Union Budget 2023

A] Tax reduction

Since 2017–18, the rates and slabs for personal income taxes have not changed. The main modification was the introduction of the “Simplified Tax Regime,” which offered a substitute for higher tax rates at the expense of several deductions and exemptions enjoyed by salaried people.

According to the finance minister, the Simplified Tax Regime will save taxpayers an average of Rs. 78,000 compared to the current tax system. The majority of taxpayers benefit from tax-saving exemptions and deductions for housing interest, leave travel allowance, and housing rent allowance, which was not taken into account in our analysis. It, therefore, came as no surprise that the new rule attracted very few followers over the past two years.

It is anticipated that this year the government will extend a clear tax cut and adjust the tax rate for a more straightforward tax system that will aid in improving taxpayers’ cash flows.

One solution for this is to raise the basic exemption threshold from the current Rs 2.5 lakh to Rs 5 lakh. All taxpayers may profit from this action.

Currently, the highest combined tax rate for taxpayers is 42.74 per cent, which is extremely high when compared to some of the neighbouring, industrialised nations (Singapore is 17 per cent, while for Malaysia, it is 30 per cent). The burden on taxpayers will be reduced thanks to rationalisation.

B] The standard deduction may be increased.

The standard deduction for employees might be raised from the existing level of Rs. 50,000 to Rs. 1 lakh, which would directly affect taxpayers’ tax outlays. Currently, only taxpayers who choose the standard tax system are eligible for this standard deduction. Regardless of the choice made, the government could consider making this benefit available to all taxpayers. For many employees, raising the standard deduction will result in higher take-home pay.

C] Chapter VI-A deductions

Since FY 2014–15, the maximum amount that may be deducted under Section 80C of the Income-tax Act of 1961 is Rs. 1.5 lakh. This limit has to be increased. The majority of Section 80C deductions encourage taxpayers to put money into long-term investments like fixed deposits, the Public Provident Fund (PPF), the National Pension System (NPS), and other long-term savings vehicles that offer long-term financing for infrastructure projects.

The government may consider making this benefit available under the streamlined system as well.

D] Reexamining the voluntary retirement programme and the exemption for retrenchment compensation

Several businesses underwent downsizing procedures last year as a result of the economic issues brought on by the Russia-Ukraine War and the worldwide recessionary tendencies. As a result, many workers have also received layoff compensation in addition to the pink slip. Retrenchment compensation and voluntary retirement plans are the only tax-saving options available under the existing tax laws.

However, the employer must meet several requirements, some of which might not always be met, to be eligible for this deduction of up to Rs 5 lakh. Therefore, in these situations, if the employer’s plan does not meet the requirements, the employee could forfeit the deduction. The Budget should consider a method to lessen this difficulty.

The government should reconsider raising the deduction threshold for the benefit and continue it for at least another year in light of the push for affordable housing and fuel conservation. The limits under Section 80D can be reviewed in light of the rise in hospitalization costs.

Currently, the maximum health insurance premium for preventative checkups for an individual, their spouse, and any dependent children is Rs. 25,000. For parents, the maximum cost is Rs. 50,000, but given the seniority of the latter, it might be increased to at least Rs. 1 lakh.

Taxpayers anticipate that the upcoming budget will contribute to a decrease in tax obligations and an increase in take-home pay. It will be interesting to watch if the finance minister lives up to expectations or sticks to her original plan as she did in prior years.

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