Key Budget Expectations on Personal Taxation Front

Ashish M. Shaji

31 Jan, 2022

The Union Budget 2022 is just a few days away from being presented in the Lok Sabha. One of the noteworthy facts here is that the budget will be presented at a critical stage for the taxpayers and Indian economy. The aftermath of Covid has been severe in India, where it has resulted in loss of employment for many, which consequently led to erosion of income for personal taxpayers. Moreover, the fiscal stimulation measures and high fiscal deficit has caused high inflation. Hence all are intently and eagerly waiting for the Union Budget to be announced on Feb 1, 2022. In this article, we shall look at the common budget expectations on personal taxation front.

What to expect?

The budget is expected to focus on the following:

• Employment generation;
• Increasing the limit for basic tax exemption;
• Standard deduction;
• Medical expenses;
• Rationalisation of tax rates;
• Social security investments.

With higher economic growth, transparent rules on taxation of crypto assets and an efficient tax administration, a higher tax revenue collection can be ensured.

Experts believe that the new tax regime that was proposed last year has not been very popular among taxpayers as in the individual taxpayer segment, a large chunk has savings. Some of them are forced savings like the EPF, and some are driven by necessities. Therefore the government should realign this in the Budget 2022 and give a straightforward tax structure. Moreover, experts feel that individuals should be encouraged to form their own social security net.

Changes expected on Personal Taxation front

Few of the changes that can be expected from Budget 2022 on personal taxation front are as follows:

• Rationalisation of tax slabs

If we also consider the effective tax rates including the surcharge and cess, and the concessional tax regime there are 10 income tax slabs ranging from 5.2%, 10.4%, 15.6%, 20.8%, 26%, 31.2%, 34.3%, 35.8%, 39%, and 42.7%. It is crucial that the highest tax rate is reasonable for greater compliance. Simplifying and rationalising the tax slabs to 5%, 10%, 15%, 20%, 25%, 30% and 35% can be a possibility.

• Increase in the limit for basic tax exemption

Currently, as per the Income Tax Act of 1961, the limit for tax exemption is kept at 2.5 lakh rupees per annum. It has remained unchanged for many years. However, as now, with the annual inflation rate of 5% and a higher cost of living, it is expected that the basic exemption limit might be raised to 3 lakh rupees. Consequently, the maximum tax rebate under Section 87A of the Income Tax Act, presently 12500 rupees, may be restricted to 10000 rupees.

• Tax deduction for Covid bonds

There is a substantial fiscal deficit, and there is a need for expenditure on infrastructure. The government needs to raise additional resource. Hence the government should look to raise funds through covid Bonds with a nominal interest rate and with a tenure of 3-5 years. The investment made in the covid bonds can be eligible for tax deductions^[1] without any limit. With tax deduction for Covid bonds, economic growth can be revived, and it can result in substantial additional income disclosure by taxpayers.

• Introduction of Work from Home allowance

Since the beginning of the pandemic, various organizations and companies have adopted a work from home model or have resorted to remote working. In many cases, hybrid work model has also been resorted to. However, this has also necessitated employees to have proper working set up like ensuring an internet connection, laptop, printer, office chair/desk etc. Hence there should be tax exemption of such allowances and/or facilities received. Alternatively, the government may also consider providing a certain amount monthly for the purpose of exemption under Rule 2B of the IT Rules.

• Clarity on taxation of cryptocurrency transactions

The much awaited crypto currency bill hasn’t been yet introduced in the parliament. According to an estimate, India has about 20 million crypto investors with an estimated investment of 10 billion dollars. Considering the amount at stake, the government should provide for taxability of gains accruing from the crypto investment. At present, there is no definite provision for cryptocurrencies, hence there remains certain amount of ambiguity in taxability of gains derived from the same. There is also no clarity in respect of the applicable tax rates or even the methodology classification of crypto assets into long or short term, taxation of mined cryptos, or disclosure requirements. GST applicability on such transactions should be also be specified. Hence there must be specific provision for taxation of cryptocurrency transactions which will remove all such ambiguities. It will also result in additional revenue.

Conclusion

Among all the budget expectations on personal taxation front, one of the top expectation from a majority of taxpayers is increase in the annual income limit for exemption of personal income tax. As per a KPMG report, in its survey, 64% of the respondents want the government to raise the tax exemption limit.

Read our Article:Expectations from the Budget 2022-23