Anticipated Changes in India’s Personal Taxation for the 2024 Union Budget

Introduction

As India prepares for the 2024 Union Budget, taxpayers anticipate potential reforms in personal taxation. These budgetary announcements often yield changes directly affecting individual taxpayers.

The personal taxation landscape in India has notably changed over the years, driven by economic reforms and efforts to simplify the tax structure. Recent major reforms include the introduction of the concessional new tax regime under section 115BAC, designed to simplify tax compliance and reduce the tax burden for individuals. This regime features lower tax rates but limits several exemptions and deductions available in the old regime. The Finance Act 2023 has established the new regime as the default for taxpayers unless they choose the old regime.

The upcoming Union Budget is likely to concentrate on:

Employment generation
Rationalization of tax rates
Increasing basic tax exemption limits
Adjusting standard deductions and medical expenses
Rationalizing tax rates and certain social security investments

Expected Changes in Personal Taxation

Reduction of the Highest Tax Slab Rate The current highest marginal tax rates under the old and new tax regimes stand at 42.74% and 39%, respectively. Given that only a small fraction of taxpayers is subject to these high rates, there is a strong rationale for revisiting them.

Recently, the government has introduced lower corporate tax rates—25.17% for general companies and 17.16% for eligible manufacturing companies. The elimination of the Minimum Alternate Tax (MAT) for these corporations positions India's corporate tax structure competitively.

In comparison, individuals face comparatively high tax rates. A proposed reduction of the maximum marginal rate to 35.88% (30% plus 15% surcharge plus 4%) aims to align personal tax rates with the reduced corporate rates. This adjustment would potentially simplify the tax structure, decreasing the number of tax slabs from seven to five in the old regime and from eight to seven in the new regime, fostering an equitable and efficient tax system.
Increase in Basic Exemption Limit The current basic exemption limit of Rs. 2.5 lakhs (old regime) and Rs. 3 lakhs (new regime) is insufficient considering the inflation and increased cost of living. The last adjustment to the basic exemption limit occurred in 2014.

To better accommodate current economic conditions, raising this limit to Rs. 3.5 lakhs in both regimes is warranted. This change would provide relief to taxpayers and promote a fairer tax structure.
Convergence of Old and New Tax Regimes The existence of two tax regimes—the old and the new concessional regime—creates complexity for taxpayers. It is difficult for individuals to compute their taxes accurately and determine the most favorable regime without flexible switching options. The new regime has not gained traction due to the absence of basic deductions like the standard deduction for salary and deductions under sections 80C and 80D of the IT Act.

A proposed solution is the consolidation of these two regimes into a single structure. This unified regime could feature a basic exemption limit of Rs. 3.50 lakhs and a maximum tax rate of 35.88%. Retaining certain deductions under section 80C for specified investments and interest for self-occupied property could simplify compliance and reduce confusion.
Rationalization of Long-Term Capital Gains Tax The current taxation on long-term capital gains (LTCG) varies based on the holding period and type of asset, which complicates the tax system. For instance, listed shares require a holding period of 12 months, while unlisted shares and real estate require 24 months.

To enhance simplicity, standardizing the threshold holding period for all capital assets to 24 months and capping the LTCG rate at 15% is advisable. This would reduce complexity and create a clearer tax framework.
Increase in Section 80C Deduction Limit Section 80C of the IT Act provides a cumulative deduction limit for various tax-saving investments. The existing limit of Rs. 1.5 lakhs, last revised in 2014, is considered outdated in light of rising costs and investment options.

To ensure taxpayers can effectively utilize their deductions against inflation, increasing this limit to Rs. 2 lakhs is recommended. Such an adjustment would significantly benefit a large portion of taxpayers.
Applicability of Grandfathering Provisions Section 55(2)(ac) of the IT Act provides grandfathering benefits for capital gains accrued up to January 31, 2018, for listed equity shares. However, this has not been extended to situations involving tax-neutral transfers, such as inheritances post-February 1, 2018.

To prevent undue hardship, it is crucial to extend grandfathering benefits to these tax-neutral transfers, ensuring fairness in tax treatment.

Conclusion

The anticipated changes to personal taxation in the upcoming Union Budget aim to simplify the tax structure, promote fairness, and address the evolving economic environment. These adjustments, if implemented, could significantly impact individual taxpayers in India, providing relief and encouraging compliance.