The coming Budget will not be a full one, but only a vote on account. While a full Budget outlines the government’s plans for spending and earning money in the coming year, a vote on account is only a temporary arrangement that estimates the money the government needs before a new government takes over after the elections.
If we go by convention, the government might not make any major announcements when it presents the Budget next month. “Major policy changes and announcements are unlikely in this Budget,” according to Aditi Nayar, Chief Economist, Icra. Even so, there are hopes that some critical changes will be announced. ET Wealth reached out to experts from different fields to understand their expectations.
Some of these expectations, especially those relating to tax deductions and exemptions, seem too optimistic. The government says it is confident of achieving the 2023-24 fiscal deficit target of 5.9% of the GDP and is committed to lowering it to 4.5% of GDP by 2025-26. However, some analysts believe the fiscal deficit may breach the 5.9% target and could hit 6%. Tax collections have been buoyant, but revenue spending has exceeded the Budget estimate by about Rs.2 lakh crore, according to India Ratings and Research. “Higher-than-budgeted revenue expenditure, in combination with lower-than-budgeted nominal GDP, will push the fiscal deficit to 6% of GDP,” it stated in a report. Icra expects the fiscal deficit target for 2024-25 to be set higher at 5.3% of GDP.
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One of the reasons for the slippage in fiscal deficit is that the disinvestment target has been missed by miles. The government had targeted disinvestments worth Rs.51,000 crore during the current financial year, but has so far raised only Rs 10,000 crore.
In this backdrop, there is little hope of any relief for taxpayers. In fact, some even expect the tax net to be widened this year. The Rs 1 lakh exemption for long-term capital gains from stocks and equity-oriented funds may be removed altogether.
However, some suggestions, specifically the one for making it easier to file belated income tax returns, have no revenue implications. The move will only help taxpayers rectify past mistakes and ensure greater compliance without affecting revenue collections. Some other suggestions, like the one on double taxation of dividends, could have some impact on revenue, but are required to remove the anomalies that exist.
We hope some of these suggestions figure in the Budget on 1 February.
1. Make belated ITR filing easier for taxpayers: SUDHIR KAUSHIK, CEO, TAXSPANNER.COM
There are several restrictions, penalties and difficult processes for filing belated tax returns. A belated ITR can be filed before 31 December if the original return is not filed before the due date. The following taxpayers aren’t allowed to file a belated ITR:
If there is neither any tax that is payable, nor refund that is due: If someone wants to apply for a loan, or visa, or conduct some other financial transactions, ITR is the most trusted and acceptable document. However, a genuine taxpayer who has paid all the due taxes is not eligible.
If refund is due or losses are to be carried forward: This is allowed with a long and cumbersome process under Section 119 (b) to apply and obtain condonation of delay from the Income-tax Commissioner. Many a times the amount is small, and the cost, time and effort in obtaining the condonation is higher. Thus, the taxpayers lose their rights and money.
Updated ITRs can be filed up to two years with penalties. The penalty is 25% and additional tax for one year’s delay, and 50% for two years’ delay. However, it can be filed only if the original return has not been filed and tax is due.
Taxpayers aren’t allowed to file for more than two years even after paying the additional tax, whereas the tax authorities can issue notices for ITRs filed up to 10 previous years if any income escaped assessment. A similar and equal opportunity should be given to taxpayers to file up to 10 years with penalties. This will encourage voluntary tax compliance.
ET Wealth view
Over the years, tax filing has been made more taxpayer-friendly. Even dispute resolution has become easier. However, several archaic practices still exist, leaving many taxpayers high and dry. Taxpayers should be allowed to file returns for previous years without any hassles. The best part is that making it easier to file belated returns has no revenue implication.
2. Revisit tax change for non-equity funds: JUZER GABAJIWALA,DIRECTOR, VENTURA SECURITIES
The removal of indexation benefit and lower tax rate for long-term capital gains from mutual funds with less than 35% in equities created a level playing field between debt funds and bank deposits. However, unlike a bank deposit, a debt fund investor is exposed to interest rate risk, as well as credit risk, if the issuer defaults. The FD investor gets his return irrespective of interest rate movements. Further, the principal amount of up to `5 lakh is also protected. This was surely not the intention and there is a need to bring parity.
Second, in the move to bring taxation at par for debt funds, collateral damage was inflicted on global equity funds, equity fund of funds, gold funds and hybrid funds holding less than 35% in equities. These funds have now become unattractive as the tax is very high. If an investor in these funds earns 15%, the post-tax return is around 10.5%, compared to 13% with earlier indexation benefit. These tax changes need to be revisited.
ET Wealth view
The tax amendment to the Finance Bill last year was a shocker for everyone. In a bid to bring parity in taxation for debt funds and bank deposits, the government unfairly turned other investment vehicles tax-unfriendly. A review of taxation for debt funds is unlikely, but the government might review taxation for other segments.
3. Make annuity income from NPS tax-free: SUMIT SHUKLA,MD AND CEO, AXIS PENSION FUND
The annuity income from the National Pension System (NPS) should be accorded tax-free status due to several compelling reasons that align with the principles of fairness, financial security and social welfare. Firstly, senior citizens often rely heavily on annuity income as a primary source of financial support during retirement years. Subscribers are mandated to purchase annuities from NPS, so taxing this income could potentially erode the financial wellbeing of seniors, hindering their ability to meet basic living expenses and maintain a decent standard of living. Further, there has been a drastic rise in medical expenditure too. Tax exemption on annuity income aligns with global practices, which recognise the importance of supporting senior citizens during their retirement years.
From 2020-21 onwards, the income from contribution to the EPF, NPS and/or superannuation fund exceeding Rs.7.5 lakh in a financial year has been taxable. This move restricts the additional savings of salaried individuals in the NPS and, hence, all future income expected from annuities is also limited. Thus, the NPS contributions should be removed from the cap, or the limit should be increased to Rs.15 lakh.
ET Wealth view
The taxation of annuity income in the NPS is a sore point, keeping an otherwise well-designed retirement vehicle from finding wider acceptance among the masses. Though the mandatory 40% annuity component in the NPS ensures regular income in retirement, the low annuity rates offered by insurers make it very unattractive. However, making annuities tax-free will burn a big hole in government finances. Senior citizens already get a Rs.50,000 exemption for interest income and a higher basic exemption.
4. Remove LTCG tax on equity gains, hike STCG tax instead: DILSHAD BILLIMORIA,FOUNDER, DILZER CONSULTANTS
Long term capital gains tax on equities—which is currently at 10% on gains beyond Rs.1 lakh–should be removed and the tax on short-term capital gains on listed securities must be increased instead. This will encourage long-term investors and investment strategies, discourage short-term trading calls and early exits, thereby making the markets long-term oriented and less volatile in the long run.
ET Wealth view
There is definitely a case for encouraging long-term investments in equities and disincentivising short-term speculation. The uptick in F&O trading activity among small investors points to the malaise. But the LTCG tax on equities introduced in 2018 is unlikely to be rolled back. In fact, the current Rs.1 lakh exemption to LTCG in a financial year may also be removed.
5. Enhance the additional deduction for NPS: RAJ KHOSLA,MANAGING DIRECTOR AND FOUNDER, MYMONEYMANTRA
In a country of more than 10 crore investors, the NPS has less than 50 lakh voluntary subscribers. The number of voluntary subscribers shot up after the Rs.50,000 deduction under Section 80CCD(1b) was introduced.
However, an investment of Rs.50,000 a year will not yield much pension. Assuming a compounded 9% return, it will grow to roughly Rs.47 lakh in 25 years and yield a monthly pension of Rs.23,528. This will be worth only Rs.5,300 if adjusted for 6% inflation. If this limit is enhanced to, say Rs.1 lakh, subscribers will be encouraged to save more for retirement. This will also help India become a pensioned society.
ET Wealth view
Tax benefits tend to drive investment choices of people, so an enhanced limit will certainly encourage them to invest more for retirement. At the same time, the NPS already enjoys several tax advantages over other retirement savings options, so enhancing the deduction would further distort the playing field.
6. Introduce scheme for child education: MRIN AGARWAL,FOUNDER AND DIRECTOR, FINSAFE INDIA
Saving for children’s education is a key goal for Indian parents. While there are various investments available for this goal, not all of them come with tax benefits. The Sukanya Samriddhi Yojana offers tax deduction and the corpus is also tax-free, but it is open only for girls below 10. Insurance plans for a child’s education offer tax breaks, but have high costs, which impacts the returns.
A scheme modelled along the lines of the NPS, but meant only to save for higher education, will be helpful. The scheme can have a lock-in period, offer market-linked returns, let investors choose the asset mix and offer tax benefits on investments and withdrawals. It can become a one-stop solution for kids’ education planning.
ET Wealth view
There are already plenty of schemes for the funding of children’s education. However, a targeted scheme with tax benefits, a lock-in period and flexibility in investments will be a welcome move. As with the Sukanya scheme, the end usage of the corpus should be defined.
7. Separate tax deduction for life insurance: VIGHNESH SHAHANE,MD & CEO, AGEAS FEDERAL LIFE INSURANCE
The investment basket under Section 80C includes Provident Fund, small savings schemes, tax-saving bank deposits, ELSS funds, life insurance, tuition fees and principal portion of home loan EMI. Even deductions under Section 80CCC for annuity or pension plans fall within the total limit of Rs.1.5 lakh. There are too many options and this limit proves inadequate for critical instruments like life insurance. There should be a separate tax deduction for life insurance premium instead of including it under Section 80C. This will encourage people to buy life insurance and secure their family’s financial future.
ET Wealth view
While a separate tax incentive may increase the sale of life insurance and, consequently, enhance insurance penetration in the country, people may still end up buying more traditional plans and Ulips for investment. Such a deduction should only be for pure protection term plans.
8. Bring pension plans at par with NPS: SATISHWAR B.MD & CEO, AEGON LIFE INSURANCE
Many Indians don’t save enough for retirement, and the gap between needed and available retirement funds is expected to reach $85 trillion by 2050. To help close this gap and encourage people to invest in pension and annuity products, it is important to make taxation simpler or remove it completely for these products. It would help if investments in pension products get the same tax benefits that are given to contributions in the NPS. The Rs.50,000 tax deduction for NPS contributions under Section 80CCD(1b), which is in addition to the Rs.1.5 lakh deduction under Section 80C, should also be extended to pension plans of insurance companies.
ET Wealth view
While the additional Rs.50,000 tax benefit is the government’s nudge for the NPS, harmonising the tax incentive across other pension plans will spur the sale of these products and help customers save more actively to secure their retirement.
9. Modify qualifying standards for affordable housing: ANUJ PURI,CHAIRMAN,ANAROCK
Affordable housing has been severely hit by the pandemic. The budget homes segment saw a decline in overall sales from nearly 40% before the pandemic to just 20% in 2023. The segment’s share in the total housing supply in top seven cities fell to 18% in 2023 from nearly 40% in 2019. Several interest stimulants offered to developers and consumers over the years have expired in the past 1-2 years.
The Ministry of Housing and Urban Poverty Alleviation defines affordable housing according to buyer’s income, size of property, and its price. Affordable housing is defined as a house or apartment valued up to `45 lakh, with a carpet area of up to 90 sq metre in non-metros and villages and 60 sq metre in metros. The RBI definition, however, is based on the loans that banks provide. It is important to adjust the qualifying cost of properties within cities’ affordable housing segment. Though the size of 60 sq m is reasonable, the price of up to Rs.45 lakh makes them unsuitable to a large share of the target audience. For instance, in metros like Mumbai, the price should be increased to at least Rs.85 lakh, and Rs.60-65 lakh in other metros. With this price adjustment, more homes will be within the reach of buyers, who can benefit from government subsidies and reduced GST.
ET Wealth view
While the adjustment will help developers build more such projects, it will incentivise the sale of affordable housing for a larger section of homebuyers, who can avail of the government subsidies and GST benefit of 1%, compared to 5% for the non-affordable segment.
10. Review definition of metro for HRA: TAPATI GHOSE,PARTNER AND LEADER, GLOBAL EMPLOYER SERVICES, DELOITTE INDIA
The Constitution recognises seven metros in the country, including Delhi NCR, Mumbai, Chennai, Kolkata, Bengaluru, Hyderabad and Pune. However, the tax provisions consider only four (Delhi NCR, Mumbai, Chennai, Kolkata) as metros, and allow taxpayers 50% of the basic salary as HRA exemption. Taxpayers in Bengaluru, Hyderabad and Pune are allowed an HRA exemption of only 40% of their basic salaries. Rentals in these cities have gone up quite a bit in the past few years. Hence, tenants in these cities should also get an exemption of 50% of basic pay.
ET Wealth view
Bengaluru, with a population of nearly 1.5 crore, is bigger than some other metros. It is surprising that it is not considered a metro for HRA purposes. Pune and Hyderabad have also grown extensively. It is high time the tax laws recognised this and reviewed the definition of a metro.
11. Hike basic exemption to Rs.3.5 lakh: SURESH SURANA,FOUNDER, RSM INDIA
The basic exemption of Rs.2.5 lakh has remained unchanged since 2014. The introduction of Rs.50,000 standard deduction three years ago provided some relief. However, this was too little and only for salaried taxpayers. Given the prevailing high inflation and rise in cost of living since the last revision, the basic exemption limit should be increased to Rs.3.5 lakh. This will benefit a large percentage of the approximately 7 crore taxpayers and cushion them against inflation.
ET Wealth view
Raising the basic exemption limit will not be easy for a government trying to control the fiscal deficit. At the same time, some relief should be given to taxpayers.
12. Same tax treatment for listed and unlisted stocks: AMIT MAHESHWARI,PARTNER,AKM GLOBAL
There are several tax advantages for investors in shares of listed companies. Long-term gains of up to Rs.1 lakh in a year are tax-free and taxed at 10% beyond this threshold. Short-term gains are taxed at 15%. However, investments in unlisted stocks don’t get the same benefits. Long-term gains are taxed at 20% after indexation and short-term gains are added to the income and taxed as per the slab rate. The startup ecosystem will flourish if it has the required capital, but the high tax levied on gains from such investments discourages investors. To make venture capitalists invest in emerging companies, the discriminatory tax treatment should be ended. Investments in unlisted companies should also get the same tax benefits as listed shares.
ET Wealth view
Unlisted shares are riskier than those of listed companies, but that should not be the reason for the discriminatory tax treatment. Giving unlisted shares the same tax benefits will encourage angel investors and venture capital firms to invest in startups and small units.
13. Bring parity in MF and Ulip taxation: ANAND K. RATHI,CO-FOUNDER,MIRA MONEY
Taxation tends to define one’s investment decisions even though the chosen instrument may be sub-optimal or doesn’t exactly fit one’s goals. Ulips and mutual funds are similar, but there is a difference in the taxation of capital gains from the two instruments. The proceeds from Ulips are tax-free under Section 10(10D) if the life cover is at least 10 times the annual premium and the corpus is withdrawn after a lock-in period of five years. However, long-term gains from equity-oriented funds beyond Rs.1 lakh a year are taxed at 10%. The 2021 Budget reduced this difference by making the income from Ulips taxable if the annual premium exceeded Rs.2.5 lakh. This Rs.2.5 lakh tax-free threshold should be done away with and there should be parity in the tax treatment of gains from these similar instruments.
ET Wealth view
Similar products should be taxed in the same way. While the 2021 Budget reduced the tax gap to some extent, bringing complete parity is necessary to ensure a truly level playing field.
14. Do away with double taxation of dividends: NISHANT KHEMANI,MANAGING PARTNER,SATURN CONSULTING GROUP
Double taxation of dividends has been a major cause for concern ever since dividends were made taxable in 2020. Dividend is paid by a company to its shareholders after paying corporate tax. The maximum corporate tax rate is 34.944%. The dividend received is taxable in the hands of shareholders at the normal tax rates. This means that the dividend is taxed again in the hands of shareholders. If the company has already paid taxes on the profits (out of which the dividend was paid), why should shareholders have to pay tax again on the same money. It may be argued that dividend is income for the investor and, hence, should be taxed. But if it is income for the investor, then dividends should be treated as a cost for the company and the payer should get a deduction for the same. The Budget should make dividends tax-free in the hands of shareholders. In case of partnership firms, profits distributed are exempt in the hands of partners under Section 10(2A).
ET Wealth view
The double taxation of corporate dividends is certainly unfair. Dividends from companies should be exempt from tax, but dividends from mutual funds should be taxed at the normal slab rates.
15. Simplify capital gains tax rules: ARCHIT GUPTA,FOUNDER AND CEO,CLEARTAX
The budget should simplify capital gains taxation by introducing a uniform holding period across domestic equities and mutual funds, a uniform long-term capital gains tax rate for all financial assets, and by bringing parity for resident and non-resident investors. A uniform 10% tax on long-term capital gains and 15% tax on short-term gains for all financial assets will simplify calculations and encourage higher compliance.
ET Wealth view
A single holding period and uniform rate for capital gains from all financial assets would certainly reduce confusion, but will not be fair for equity investors who take a higher risk than other investors.
