The countdown for the Union Budget has begun and there are only few days left to go for its commencement on February 1, 2020. This year, there’s high expectations among individual taxpayers, investors and businesses as the corporate tax cuts and other measures taken in 2019 have failed to bear significant results.
The needs and wants of the Indian taxpayer are diverse. While lower income tax rates feature prominently on the wish list of individual taxpayers, investors are looking for relief from long-term capital gains tax (LTCG). Corporates, on the other hand, desire that the finance minister abolish the dividend distribution tax (DDT).
However, in this article, we will delve exclusively into the common man’sBudget 2020 wish list.
Increase in income tax exemption limit
Budget 2020 may usher in some good news for salaried professionals. Taxpayers in the mid-level income bracket have long been awaiting an increase in the income tax exemption limit from Rs. 2.5 lakh to 5 lakh.
After a series of reductions in repo rates by the RBI, stimulus packages and the corporate tax cut, the economy is yet to show any sign of revival. Moreover, there has been no significant increase in consumer demand to spur growth.
An increase in the taxable income slab will leave more disposable income in the hands of taxpayers and may lead to increased retail consumption. However, it will put considerable strain on the government’s revenue (which has been already dwindling). Earlier, the exchequer had to take a hit of Rs 1.45 trillion after the reductions in corporate tax rates.
Brand new income tax slabs and rates
Salaried professionals not only want the government to provide tax exemption on annual income up to Rs. 5 lakh, but also want new income tax slabs and lower rates. Here’s what the current tax rates look like:
Income Tax Slab
Income Tax Rate
2.5 - 5 lakh
More than 5 lakh and less than 10 lakh
10 lakh and above
A significant chunk of taxpayers would benefit from new slabs and lower rates. With the suggested slabs and rates, it is estimated that around 1.47 crore taxpayers would shift from the 20% slab to the 10% slab. Here’s what the taxpayer suggested rates look like:
Income Tax Slab
Income Tax Rate
0 - 2.5 lakh
Rs. 2.5-10 lakhs
Rs 10 - 20 lakh
Rs 20 lakh - 2 crore
2 crore and above
Increase in deduction limit under Section 80C
Many individual taxpayers are also expecting the government to allow enhanced deductions under Section 80C of the Income Tax Act, 1961. Currently, standard deductions under Section 80C are available up to a limit of Rs. 1.5 lakh. These deductions are available for the Public Provident Fund (PPF), Equity Linked Savings Schemes (ELSS), insurance premiums, tax-saving fixed deposits, home loan repayments and other related investments.
However, the limit proves insufficient for the majority of taxpayers. For instance, even if you are paying an EMI of Rs. 12,500 for your home loan, you can easily exhaust the maximum deduction of 1.5 lakh available (12 x 12,500 = Rs 1.5 lakh) under Section 80C. That leaves other investments and expenses such as insurance premiums, tax-saving mutual funds, PPF and others uncovered. Therefore, taxpayers want the government to increase the limit to at least Rs. 2 lakh.
Increased limit for medical expenses
While medical costs have been rising in India, the medical expenses exemption available to taxpayers, under Section 80D of the Income Tax Act, still remains inadequate. Taxpayers want the Finance Minister to increase medical expenses exemption from the current Rs. 25,000 to Rs. 35,000 in Budget 2020. Citizens believe that increasing the medical expenses exemption limit will provide some relief to taxpayers and help them balance the rapidly increasing household expenditure on medical care and hospitalization costs.
Increase in exemption limit for LTCG (Long Term Capital Gains)
The LTCG tax, introduced in 2018, was a setback for equity and equity-linked mutual fund investors as well as the industry. According to experts, LTCG tax has not been able to garner much revenue for the government and has only succeeded in discouraging retail investors from holding on to their investments for a longer period.
Retail investors want the government to increase the exemption limit on long term capital gains from the current Rs. 1 lakh to Rs. 2 lakh. Some are of the opinion that the government should roll back the LTCG tax completely. If this happens, it will most likely boost equity and mutual fund investments in 2020.
While India’s equity market is a huge $2.2 trillion market, investors have to deal with several taxes such as transaction tax, GST, stamp duty and capital gains tax. A rollback of LTCG tax and a streamlined cost structure will spur on wider participation and improve liquidity in the markets. It would act like a booster shot for stocks, mutual fund investment, bonds and commodities and immensely help in encouraging long-term investments in these instruments.
It is likely that Budget 2020 will bring significant relief to taxpayers and investors alike. If you,too, have been planning to start your investment journey or diversify your portfolio, now is the right time to make your move.
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