People’s spending habits, especially in metro cities, have changed significantly. This has pushed upper-middle-class taxpayers into higher tax slabs earlier than expected. The government may reconsider the higher tax slabs.
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The date for the presentation of the Union Budget is approaching. The government is likely to announce simplification of income tax slab rates and increased deductions in the budget. This will provide significant relief to taxpayers. The government has attempted to simplify income tax rules over the past few years. However, further simplification is needed.
1. Need to link income tax to inflation
Tax slab ranges have remained stable, while the cost of living has risen due to inflation. Linking tax slab rates to inflation could prevent taxpayers from moving into higher tax brackets simply because of rising daily expenses. Linking slabs to inflation would also make it easier for families to plan their budgets.
2. The limit of higher tax slabs should be increased
People’s spending habits, especially in metro cities, have changed significantly. This has pushed upper-middle-class taxpayers into higher tax slabs earlier than expected. The government could reconsider higher tax slabs. For example, the tax slab for 30% tax could be increased to Rs 30 lakh. Additionally, the slab bands could be reduced from 7 to 5.
3. Benefits of some deductions even in a simple tax regime
The aim of a simplified tax regime is to reduce paperwork. Including certain deductions could strengthen individuals’ financial health in the long run. This would also reduce the complexity of the system. Deductions could be allowed for retirement savings, health insurance premiums, and home loans.
4. Standard deduction should be linked to salary
Currently, the standard deduction is fixed. This doesn’t reflect differences in salary structures, city-related living expenses, or required contributions to the pension fund. Instead, the standard deduction could be linked to salary. For example, an employee could be given a standard deduction equal to 5% of their salary. This would increase the standard deduction as their salary increases.
5. Incentives for regular tax payers
Incentives could be introduced for regular tax payers above a certain threshold. They could be given priority access to government infrastructure. They could be offered benefits such as consultations with tax authorities on tax matters and medical benefits.
6. Easy return filing rules for income up to Rs 12 lakh
The Annual Information Statement (AIS) will improve data pre-population to ensure that tax authorities have access to most income-related information for taxpayers with income up to ₹12 lakh. Taxpayers eligible for rebate under Section 87A file returns only to confirm pre-filled data. A simplified or auto-accepted filing system could be introduced for them. In cases where there are no discrepancies, filing returns could be exempted. This would increase compliance.
7. Consideration of the need to maintain two regimes
Currently, both the new and old income tax regimes are available for use. Individuals have to calculate their taxes, deductions, and exemptions twice each year to determine which regime best suits them. The government may decide in the future whether maintaining two regimes is practical.
Hiren Shah (Executive Director-Deloitte India and Meena Khivasara, Manager-Deloitte-India)
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