Middle-class taxpayers are looking forward to a number of initiatives from Finance Minister Nirmala Sitharaman in the upcoming Budget 2023. Some of the demands of Indian taxpayers include a simplified capital gain tax regime, lower income slabs under the new tax regime, and bigger income tax deductions for prepayment of house loans despite rising interest rates and high inflation.
People who choose the new tax system must give up several exemptions and deductions. Experts contend that as a result, a sizable portion of the taxable population does not favour the tax regime. “The Budget 2023 could lower the highest income tax slab rate in the new tax system,” said Tapati Ghose, Partner, Deloitte India. “This would raise disposable income in people’s hands and give savings, investments, and consumption momentum to pre-Covid level.”
“Hence, there is a need to relook at the slabs and the tax rates. The tax rates at the highest slab may be reduced to 25 per cent (with a surcharge) at par for corporate tax rates. The consequent reduction of the rates for the lower slabs will be required,” she added.
The country’s capital gains tax system as it stands now is complicated. Depending on the type of asset, there are many time frames for classifying assets as short-term and long-term. Depending on the asset and holding duration, capital gains from an asset may be long-term gains or short-term gains.
For instance, a 10% long-term capital gains (LTCG) tax is applied on the sale of listed equity shares or units of equities-oriented funds, and a 12-month holding period is required to qualify as a long-term holding period. If the shares are not listed, there will be a long-term capital gains tax (LTCG) of 20% for residents and 10% for non-residents with a holding period of 24 months. Depending on the status of the tax investors, the tax profits on short-term capital gains (STCG) also range from 15% in the case of listed shares to the taxpayer’s income tax slab rate. Additionally, certain assets qualify for indexation benefits while others do not.
According to analysts, the Union Budget 2023 could introduce a more logical tax structure to streamline the capital gains tax system. “The holding period for all financial assets including both listed and unlisted equity/preference shares, equity-oriented mutual funds, etc., instruments like RIET/InvtIT units, debt-oriented mutual fund units, bonds, debentures, etc should be aligned to a uniform 12 months. The holding period for non-financial assets may be longer than 36 months. As for rates, all financial assets may have a uniform rate of 15% for short-term capital gains and 10 per cent for long-term, for both residents and non-residents. With the suggested alignment, indexation benefits on LTCG on financial assets may not be required. This would encourage investment decisions to be guided by factors other than just the distinction in the holding period and tax rates,” said Sameer Gupta, National Tax Leader at EY India.
“To simplify capital gains taxation, capital assets could be categorised in a maximum of two to three categories and tax rates could be made uniform across these categories, thus reducing the disparity that exists in tax rates for similar asset classes,” Ghose added. “Further, the holding period for determination of long-term and short-term gains could be rationalised to result in fewer capital gains classifications and applicable rates. This would enable simpler choices for the retail investor and minimise errors,” she added.
In recent months, the Reserve Bank of India (RBI) has raised the repo rate on a consecutive basis in an effort to combat inflation. Homebuyers may receive some relief from the budget for 2023. According to experts, there may be room to raise the cap on deductions for principal and interest payments on mortgages.
According to experts, the current cap on interest on housing loans for self-occupied properties is Rs 2 lakh under section 24(b) of the Income-tax Act, which does not include interest rates for the initial few years, even for affordable houses. According to Kaushal Agarwal, Chairman of The Guardians Real Estate Advisory, “the government should raise the tax deduction limit for home loans from Rs 2 lakh to Rs 5 lakh per year, thereby providing tax relief to homebuyers, in order to attract homebuyers from across the country, particularly first-time buyers.”
According to section 80C, which also includes a number of other contributions and payments and has been stable for several years, the deduction for principal payments on home loans is restricted to Rs 1.5 lakh. “It is vital to boost the tax subsidy on housing loans from its historical level of Rs 2 lakh and Rs 1.5 lakh for both the principal and interest. According to Shrikant Shrivastava, chief risk officer of IMGC (India Mortgage Guarantee Corporation), “an increase in an existing tax deduction for home loans will offset the higher EMI burden and leave some surplus to spend and improve the Indian economy.”