Changes expected in new tax regime
To encourage more taxpayers to file income tax returns and comply with income tax laws, the government introduced a new tax regime from FY 2020-21. The new tax regime proved to be beneficial for many taxpayers as more than 70% of individual tax filers opted for the new tax regime for FY 2023-2024, especially those with taxable income below Rs 7 lakhs. These taxpayers enjoyed NIL tax due to the rebate available under Section 87A. Taxpayers with taxable incomes exceeding Rs 5 Cr, enjoyed a lower total tax rate of 39% (including surcharge and cess) in the new tax regime compared to 42.744% in the old tax regime.
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However, for FY 2023-24, out of the 12.79 crore individual taxpayers registered on the income tax portal, only 8.68 Cr. individuals filed ITR.
In order to increase taxpayer compliance and to widen the coverage of new tax regime, the government could make the following amendments in this regime:
- For salaried taxpayers, the standard deduction could be increased from the current Rs 75,000 to Rs 1 lakh. This was last increased in Budget 2024 from Rs 50,000 to Rs 75,000
- Further simplify and reduce the income tax slabs from six to three slabs and reduce the highest tax rate from 30% to 25% to align with the general corporate tax rate.
- Extend the tax rebate under section 87A to taxpayers with taxable income up to Rs 10 lakh from the existing limit of Rs 7 lakh.
- Considering the government’s ‘Housing for all’ agenda, the deduction for interest on loans of up to Rs 2 lakh for self-occupied house property could be introduced in the new tax regime. This is currently available only in the old tax regime.
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Long awaited tweaks in the old tax regime
With the new tax regime being the focus of the government, major changes in the old tax regime are unlikely. However, if the old tax regime continues for a few years as an alternate regime, a few important changes that have been on the taxpayers’ wishlist for a few years, could be addressed:
- Higher exemption for rent paid in non-metro cities
HRA exemption is available up to 50% of basic salary for rented accommodation in Delhi, Mumbai, Chennai and Kolkata whereas the exemption is capped at 40% of basic salary for other cities.
Cities such as Bangalore, Pune, Hyderabad, Gurgaon have evolved into major economic and technological hubs, comparable to traditional metro cities such as Mumbai, Delhi, and Chennai. Hence, the HRA exemption cap for these cities needs to be enhanced to 50% of basic salary.
- Tax benefit for interest on savings accounts and fixed deposits
When interest rates on savings accounts are low and inflation erodes the purchasing power of money, taxpayers typically move funds to fixed-term deposits to earn higher returns on their savings. Hence, to incentivize savings, the government could extend the deduction under Section 80TTA, which is currently restricted to interest on savings accounts, to the interest on term deposits and increase the limit under this section to Rs 50,000. This will be in line with the deduction available for senior citizens under Section 80TTB.
- Income tax benefits on buying Electric Vehicles (EV)
EVs are paving the way for a greener future and availability of better infrastructure has propelled EV sales in India. An employer-provided car enjoys concessional tax treatment as per the Income tax rules. However, there is currently some uncertainty on whether the benefit covers an electric car, as well. Explicit provisions around this could encourage employers to include electric cars in their car-lease schemes and drive up the demand for EVs further.
A deduction of up to Rs 1,50,000 per annum (from gross total income) was available for interest on loans taken until March 31, 2023, for individuals for the purchase of an EV. The government could extend the time limit for this deduction further to encourage taxpayers to opt for EVs when buying vehicles.
- Double taxation on NPS, EPF and SAF
An employer’s contribution to an Employees’ Provident Fund (EPF), superannuation fund (SAF) and National Pension System (NPS) in excess of Rs 750,000 is taxable in the year of contribution. The same PF/superannuation fund balance will be taxable at the time of withdrawal if the conditions for exemption (for e.g., 5 years of continuous service) are not complied with. There is a need for a specific exemption at the withdrawal stage to exclude the income that is already taxed in the year of contribution. In the absence of any such law, a double taxation of the same income arises, which is unlikely to be the intention of the law.
- Foreign income related challenges
Foreign Tax Credit (FTC) should be allowed to be considered by employer for TDS:
A resident taxpayer can claim credit for taxes paid overseas in his ITR filed along with Form 67. However, if the same income, say salary, is also subject to tax and TDS in India, there is currently no enabling provision to factor credit for overseas taxes at the time of deducting tax at source on salary income by the employer. Specific provisions for the employer to factor credits for overseas tax while deducting tax in India could help such taxpayers avoid the hassles of paying tax in both countries and then claiming a tax refund.
Extending the due date for filing belated or revised tax returns beyond December 31
Taxpayers face issues in claiming the credit for tax paid in foreign countries while filing ITR in India as many overseas countries follow the calendar year as their tax year. Typically, an Indian ITR would be revised to reflect the overseas tax return position after the overseas tax return is filed. With the revised return deadline now advanced to 31 December of the assessment year, the overseas return in most cases is not available with the result that taxpayers have to forgo tax credits. To address this challenge, the due date for filing a revised / belated return should be extended beyond 31 December of the assessment year.
(Mousami Nagarsenkar is a Partner and Dipika Thakkar is a Deputy Manager with Deloitte Touche Tohmatsu India LLP)
