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Income tax slab rate expectation: Big income tax changes for the salaried class likely in Budget 2019

This being the Modi government's last budget before the general elections in summer, speculation is rife that tax sops, new schemes and tax changes are in the offing

twitter-logoBusinessToday.In | February 1, 2019 | Updated 10:56 IST
Income tax slab rate expectation: Big income tax changes for the salaried class likely in Budget 2019

Interim Budget 2019 will be unveiled in just a few hours and the time for speculation is fast ending. Given that this is the Modi government's last budget before the general elections in summer, speculation is rife that tax sops, new schemes and tax changes are in the offing.

"We believe while the government will stay tethered to prudence, the balance will tilt in favour of populist measures designed to assuage restless voters who are currently sitting on the fence. We feel that the focus of the government in a populist budget would be to increase the disposable income in the hands of the citizens," said Anirudha Taparia, Executive Director, IIFL Wealth Management.

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So, as a quick recap, here's what the common man as well as industry bodies want from Interim Finance Minister Piyush Goyal today:

1.     Hike the maximum deduction limit under Section 80C

The logic is that that the hike of Rs 50,000 granted in Budget 2014, which increased the tax exemption limit from Rs 1 lakh to Rs 1.5 lakh, hardly provides any relief in the face of rising cost of living and inflation.

Moreover, for many people, the current 80C limit quickly gets exhausted through expenses like tuition fees, provident fund contributions and payments made against home loan principal. This leaves little room to save through permissible investments such as five-year notified tax-saving bank deposits, Public Provident Fund (PPF), National Savings Certificate (NSC), equity-linked savings schemes (ELSS), subscription to notified securities and deposits schemes, and more. An increase in this limit will, hence, allow individuals to channelise long-term savings into capital markets.

While most experts say a hike to Rs 2 lakh would also help - allowing taxpayers to save Rs 2,500 to Rs 15,000 in taxes - the Confederation of Indian Industry (CII) recommended that the limit be raised to Rs 2.5 lakh to provide saving opportunities to public at large.

2.     Increase the income tax exemption ceiling

In Modi government's first budget - which was considered a harbinger of 'achhe din' - the personal income tax exemption limit had been raised by Rs 50,000 to the current ceiling of Rs 2.5 lakh, resulting in tax saving of Rs 5,150 for all taxpayers. Speculation is rife that today could bring some good news on this front.

Experts say that the recent introduction of the 10 per cent quota for the economically weaker sections (EWS) makes a strong case for doubling the exemption limit to Rs 5 lakh. As per the eligibility criteria, people who earn less than Rs 8 lakh annually will be eligible for the quota, which makes nearly 100% of Indian households eligible beneficiaries currently as per government data. So this makes a strong case for increasing the income tax exemption limit - the idea being to get the non-taxable portion as close to the new Rs 8 lakh benchmark as possible.

However, given the current fiscal constraints, government sources say that it is likely that the exemption limit will only be pushed up to Rs 3 lakh. Even then a significant number of Indians stand to benefit - of the 5.7 crore people who file their tax returns, reportedly around 2.7 crore taxpayers boast incomes up to Rs 3.5 lakh.

3.     Revise tax rates and/or slabs

The industry chambers have gone a step further to recommend tinkering with tax rates, too. Currently, individuals earning between Rs 2.5 lakh and Rs 5 lakh are required to pay 5% tax along with cess, while those in the Rs 5-10 lakh bracket have to pay 20% and the tax rate for incomes over Rs 10 lakh is 30%. That's a very steep jump between the first two tax brackets so the government may consider some rationalisation.

The CII, in its pre-Budget recommendations, suggested that the Rs 5-10 lakh bracket should be taxed at a lower rate of 10%, those with income between Rs 10 lakh and Rs 20 lakh be taxed at 20% and lowering the rate for the top bracket from 30% currently to 25%.On the other hand, FICCI's wishlist includes a revision in the tax slabs for the individual taxpayers with the top 30% rate applicable only beyond Rs 20 lakh annual income.

4.     Hike deduction ceiling under Section 80D

Every individual or Hindu Undivided Family can claim a deduction on payment of medical insurance premiums in a fiscal, which is over and above the benefits under Section 80C. Currently, an individual can claim a deduction of up to Rs 25,000 for the insurance of self, spouse, and dependent children. If you have taken medical cover for your parents, you are eligible for higher deductions - to the extent of Rs 25,000, if they are less than 60 years of age, or Rs 50,000 if your parents are senior citizens. The last budget had increased the Section80D deduction for senior citizens from Rs 30,000 to Rs 50,000.

Given that medical inflation is pegged to be growing at 14-16%, this is a prudent tax-saving investment to take care of unforeseen healthcare expenses. But experts say that the current limit is not enough for a family with children, especially with lifestyle diseases on the rise. Hence, there is a strong case for raising the deduction ceiling. It will also motivate Indians to seriously look at medical insurance - reportedly only 20% of the population boasts some kind of health cover, making India one of the world's least insured nations.

5.     Increase standard deduction amount

Last February, former Finance Minister Arun Jaitley introduced standard deduction of Rs 40,000, which resulted in an additional income exemption of up to Rs 5,800. However, salaried taxpayers weren't impressed since he had also scrapped transport allowance and medical reimbursement. So some experts now want this amount to be increased to Rs 75,000.

However, according to government sources, it is likely that the standard deduction will be increased more marginally to Rs 50,000 today.

6. Extend tax deduction on home loans

There could also be some real estate sops in the offing, especially given the current government's focus on affordable housing. With home loans costing around 8%, home buyers will be looking at some relief in the upcoming budget. The current deduction allowed for interest paid on home loans is Rs 2 lakh a year, which experts say is too low to cover the amount of interest paid.

According to government sources, it is possible that the budget will announce a hike in this deduction limit to Rs 2.5 lakh a year.

Granting any of the above wishes would directly benefit the middle class, thereby avoiding a possible backlash from this demographic in the upcoming polls. Last but not the least, the government recently tweaked the New Pension Scheme (NPS) - also known as National Pension Scheme - to not only hike up the Centre's contribution to the corpus from 10% to 14% but also introduce tax exemptions on withdrawals up to 60%. These new rules are likely to be introduced via Finance Act 2019 and, if passed, they will come into effect.

Also Read: Budget 2019 Live Streaming: When and Where to watch; here's everything you need to know

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