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Budget 2023 income tax: Why concessional tax regime is not popular among taxpayers; 3 steps needed


Budget 2023 income tax expectations: The concessional tax regime (“CTR”) was introduced in the Budget 2020 (effective form FY 2020-21) with an intent to do away with a host of exemptions and deductions under the Income Tax Act, 1961 (“Act”) in order to reduce the compliance burden for individual taxpayers as also the administrative burden for employers and tax authorities. It was also inferred as a first step for eventually moving towards a tax regime of low/moderate tax rates without exemptions & deductions.
The CTR provides individual taxpayers with an option to pay taxes at reduced slab rates by forgoing certain deductions and exemptions which are otherwise available under the existing tax regime. A comparison of the slab rates under both regimes is enclosed.

Why isn’t the CTR popular/widely opted for by individual taxpayers?
Though the tax rates under the CTR are lower as compared to the existing regime, however, basis the number of taxpayers opting for the CTR, one can infer that the reduction in tax rates is not attractive enough for individuals to forego their exemptions and deductions. For instance, take the case of an individual with an annual income above Rs 15,00,000, the CTR is only beneficial if the combined exemptions and deductions not allowable under CTR are less than Rs 2,50,000.
If one were to consider only some of the basic exemptions and deductions (amongst others) availed by most salaried individuals in India i.e., 80C, 80D, standard deduction (Rs 50,000) and HRA exemption – these would in most cases add up to much more than Rs 2,50,000 thereby making the CTR academic. This is explained by way of the table below:

The threshold of Rs 2,50,000 worth of deductions and exemptions (discussed above) further reduces as the annual income reduces below Rs 15,00,000. e.g., For an individual having an annual income of Rs 7,50,000, the CTR is beneficial only if the combined exemptions and deductions (which they give up under the CTR) are less than Rs 1,25,000 (which in most taxpayers is not the case given the increased awareness and adoption by Indians towards insurance products (health and life) and investments – PPF, ELSS, etc.).
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How can the CTR be made more effective?
1. Change in slab rates under CTR as provided below:

2. Retain the standard deduction of Rs 50,000 under the CTR
3. Introduce a combined deduction of up to Rs 2,50,000 in the CTR under the following:

  • 80C – Provident fund (including PPF) & qualifying life insurance products (To clarify, while the current scope of section 80C is very wide and covers a gamut of insurance savings, expenditure, etc., under the proposed CTR, its scope may be reduced to PF/PPF and qualifying life insurance products)
  • 80CCC – Pension policies
  • 80CCD(1)/(1B) – Employees / self-contribution to NPS
  • 80D – Mediclaim Insurance
  • Interest on housing loan

The rationale for retaining the above is the absence of a universal social security benefit to all citizens of India, regardless of the level of income in view of which middle- and high-income earners need to provide for their own security.
Also Read | Union Budget 2023: Will hiking basic exemption limit under new tax regime benefit taxpayers? Explained
However, finally, the call of the day may be to gradually shift towards a unified tax regime with lower tax slab rates and specific/pertinent exemptions and deductions (instead of having two different tax regimes) which will go a long way in reducing the compliance and administrative hassles for both taxpayers and the tax authorities.
(Surabhi Marwah is Tax Partner – People Advisory Services at EY India. Uday Bhartia, Senior Tax Professional, EY India contributed to the column. Views are personal)





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Delhi News

Union Budget 2023 for salaried: Why income tax slabs need to be revised; top 4 expectations for individuals


By Tapati Ghose
The Indian economy has been resilient during and post the pandemic, and is slowly returning to normalcy. From an individual’s perspective, the first expectation would be to spur investments and savings and the government would do well to channel these in the right direction. This could be put into effect in a few ways:
Expectation #1 Revision of tax slab rates:
As per current income-tax provisions, the highest slab rate (after including surcharge and cess) for income exceeding Rs 5 crores in India is 42.744%. This is significantly higher than some of the countries in Asia Pacific. To name a few- the highest tax rate for Hongkong is 17%, that of Singapore is 22%, while in Malaysia it is 30%.
The tax rates for individuals have not been changed since FY 2017-18, apart from the new tax regime, which is subject to onerous conditions. Hence, to give more purchasing power to individuals and provide some tax relief, it is expected that the highest tax rate of 30% be reduced to 25%, and the threshold limit for the highest tax rate be increased from Rs 10 lakhs to Rs 20 lakhs. With this, the highest slab rate (including surcharge and cess) may be reduced to 35.62% from 42.744%.
Similar changes may be considered under the new regime for annual income of Rs 15 lakhs and above as well.
Expectation #2 Increasing the limit for various deductions
With the intent to incentivise the lower and middle class that have faced the most hardship during COVID, the government is expected to relook at the deductions that are currently available, and that have remained unchanged for several years.
  1. Section 80C of the Act for payments/investments towards life insurance premia, contributions to provident fund, subscription to certain equity shares or debentures, etc., is capped at Rs 150,000. With increase in cost of living and increase in inflation, the government should look at increasing the limit under section 80C to Rs 250,000. This will have two-fold benefit – individual taxpayers would be willing to save more and in turn will benefit from a lower tax outgo, thereby increasing their disposable income to meet the rise in prices of various commodities.
  2. Section 80D – Deduction in respect of health insurance premium is capped at Rs 25,000/Rs 50,000. Considering the increase in the cost of medical treatment and insurances, the erstwhile limit under this section is expected to be revisited.
  3. Section 80TTA allows deduction of up to Rs 10,000 in the hands of individuals and HUFs, in respect of interest on savings account with banks, post offices and with co-operative societies carrying on business of banking. This benefit should be extended to all types of bank deposits including fixed deposits. Further, the limit should be increased from Rs 10,000 to Rs 50,000.
  4. Section 80EEA – In order to avail a deduction in respect of affordable housing, loans should be sanctioned during the period April 2019 to March 2022. With the rise in demand for residential real estate in metropolitan and Tier-II cities, it is expected that deduction be allowed for the following years as well. The condition for availing loan should be extended for at least 3 years i.e. up to 31st March 2025.
  5. 80EEB – Deduction in respect of purchase of electric vehicle is available only if loan has been sanctioned by the financial institution between April 2019 and 31st March 2023. The condition for availing such loan should be extended by at least 2 years i.e. up to 31st March 2025.

Also Read | Budget 2023: How income tax burden of common man can be reduced; top 3 ways
Expectation #3 Provide relief for expenditure incurred to work from home
The concept of a workplace has changed significantly, thanks to COVID. With homes becoming extensions of offices and the new workplace, employers need to ensure that employees, from administrative staff to senior management, are able to work efficiently and effectively. Facilities which in normal course are made available to employees in offices, must be extended to homes – not as benefits to employees, but to enable effective work. These facilities are not specifically called out as exempt in India’s taxation laws. It is crucial that this is clarified in the Budget to avoid litigation. Some areas of consideration are:
1) Support for infrastructure costs: These could include furniture such as ergonomic chairs, work tables, computers, power back up, OR could be
2) Periodic expenses: Internet charges, electricity bills, mobile expenses
3) Companies will be looking at alternatives to gym and crèche facilities in the offices
These may be provided as a reimbursement or as an allowance and should not be looked at as benefits that are taxable.
Expectation #4 – DTAA benefits at withholding stage
With travel returning to normal, employees have started moving across borders and will need to avail of relief under the Double Taxation Avoidance Agreement to avoid double taxation.
Section 192 of the Act provides for tax deduction at source on taxable salary, by the employer. However, it does not explicitly provide claiming DTAA benefit while calculating tax at source (TDS) in case of individuals.
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Typical benefits under DTAA would include the following:

  • Exemption of salary paid in India for services rendered outside India in case of individuals who qualify as a Non-resident (‘NR’) of India as per the DTAA
  • Foreign tax credit in case of individuals who qualify as Resident and Ordinarily resident (‘ROR’) of India.

Since the current provisions do not allow for relief under DTAA at withholding stage, higher tax is deposited which is claimed as refund at the tax return stage. It also poses hardship to employers such as cash flow and administrative challenges, in following up for refunds.
Section 192 should be amended to expressly provide that while calculating TDS at the time of payment of salary, benefit under DTAA should be provided for.
(The author is a Partner at Deloitte India. Views expressed are personal)





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