Will Budget 2024 Tweak Personal Taxation Laws?

As the air thickens in anticipation of the upcoming Budget 2024, it is only natural that we hear more and more discussions on changes relating to personal taxation. Though this is only an interim budget, expectations still run high. So, will the government tweak existing laws now or after the General Elections? What is the expectation of the individual taxpayer, what potential changes can we expect, and how might they impact our wallets?

Several factors are driving the speculation surrounding personal income tax reform changes. Let’s discuss few of them below: 

The global economic uncertainty combined with the volatile geopolitical situation raises concerns about government revenue; tweaking tax brackets or deductions could be seen as a way to stabilise income.

Inflation continues to pose challenge with the rising cost of living that erodes the purchasing power of taxpayers. Adjustments to tax brackets or tax-free thresholds could provide some relief. 

We are in an election year, and everyone is adopting a wait and watch approach. Tax policies could be one of the widely debated topics with diverse expectations. It would be interesting to see how this is navigated in the interim budget. 

Are we heading towards a tax regime devoid of any deductions or exemptions for the individual taxpayer? 

Going by the approach taken in the previous budgets, we certainly appear to be moving in that direction. The government's pursuit of an exemption-less system, while promising administrative efficiency and enhanced transparency, however, requires careful consideration. Removing a plethora of deductions/exemptions would theoretically streamline tax collection and potentially broaden the tax base. However, elimination of key deductions, particularly those relating to healthcare and housing, could disproportionately impact salaried individuals who are already tiding over rising cost of living. Striking a balance between administrative elegance and taxpayer burden remains a crucial challenge.

Further, individual taxpayers have year-on-year called for an upward revision of the limits prescribed under section 80C. Given the relentless march of inflation, a hike from the current Rs 1.5 lakh limit to at least Rs 3 lakhs seems imperative.

There is also an expectation for increase in the limit of standard deduction to provide relief to salaried individuals. A higher standard deduction could offset the impact of inflation and rising living costs. Additionally, revisiting the condition and limit for house rent allowance, particularly in non-metro cities, would help address the current disparities as well the hit on the taxpayer’s pocket.

Another area of change that one could expect in the budget is making the new tax regime as the default regime without the option of switching to the old one.

We know that the new regime has been made as the default regime for tax withholding as well as return filing purposes. However, one has the option to switch to the old regime if that is more beneficial. While the new regime that has calibrated the income slabs and tax rates should translate into increased disposable income, the devil lies in the details. The devil, in this case, takes the form of reduced deductibility under the new regime. A critical analysis of the proposed trade-off between beneficial tax rates and curtailed deductions is essential before endorsing the new system.

The budget should include measures to incentivise taxpayers to adopt the new tax regime before it is mandated as the only regime going forward. Incentives could range from lower tax rates to additional deductions for those who choose to transition to the new default option.

As Budget 2024 approaches, expectations surrounding personal income tax laws are diverse and intriguing. From a potential move towards an exemption free income tax system to enhanced deductions, the upcoming budget could have significant implications for the common man. The government's decisions will not only impact individual finances but will also shape the broader economic landscape, influencing spending patterns, investment decisions, and overall economic growth. A budget that goes beyond mere tax figures and addresses broader concerns would be a welcome step. Salaried professionals might benefit from enhanced medical insurance cover deductions, simplified filing procedures or tax breaks for childcare expenses/ pursuing higher education. Such measures, woven into the fabric of the budget, would foster a more equitable and inclusive tax landscape.