Finance Minister Nirmala Sitharaman will present Union Budget in Parliament at 11 a.m. this morning. From economists and analysts to the common man, all eyes will be on any minute changes in the income tax structure. Every year, speculations on major income tax changes in Union Budget - potentially putting more money into the pockets of the common man - drive investment decisions for many individuals, say financial planners. (Also Read: Budget May Offer Production Incentives For Semiconductor Makers)
The government is looking at ways to incentivise the individual taxpayers in the upcoming Budget, news agency IANS reported last week citing a source privy to talks in the matter.
While direct taxes form a major source of income for the government, a hefty corporate tax cut late last year cost the government Rs 1.45 lakh crore in revenue. This came at a time the government is likely to miss its fiscal deficit target and may leave limited room to dole out cuts in personal taxes, say economists.
However, if speculations of income tax changes come true, the additional money in the pocket of the common man might help kickstart consumption at a time the economy has hit the worst pace of expansion in more than six years.
But how will the income tax structure be changed?
In its pre-Budget memorandum for 2020-21, industry body Confederation of Indian Industry (CII) has suggested the following revisions in income tax slabs:
|Income Tax Slab||Tax Rate For Individuals Below 60|
|Up to Rs 5 lakh||Nil|
|Rs 5,00,001 to Rs 10 lakh||10%|
|Rs 10,00,001 to Rs 20 lakh||20%|
|Rs 20 lakh to Rs 2 crore||25%|
|Above Rs 2 crore||35%|
And this is how the income tax slabs are placed:
|Income Tax Slab||Tax Rate For Individuals Below 60|
|Up to Rs 1.5 lakh||Nil|
|Rs 2,50,001 to Rs 5,00,000||5%|
|Rs 5,00,001 to Rs 10,00,000||20%|
|Above Rs 10,00,000||30%|
Considering the steep rise in cost of living due to inflation, it is suggested that basic limit for exemption and other income slabs should be enhanced to give benefit to low income group, the industry body has said.
"While we understand that given the current low demand and revenue constraints, it would not be possible to rationalize the rates to a large extent. The government may look at creating a roadmap for reduction of tax rates for individuals, with the removal of all incentives and deductions," the CII said.
Financial planners say some rationalisation should be carried out in the Budget to moderate the tax rates.
"Prevailing maximum exemption limit of Rs 2.5 lakh (non-senior citizen) has not been changed from last five years. Hence, there is need to increase the limit to Rs 3.5 lakh," said Ashok Shah, partner, NA Shah Associates LLP.
"Currently, there is a steep jump of tax rates. Income up to Rs 5 lakh is taxed at 5 per cent and from Rs 5-10 lakh at 20 per cent," he said.
Some rationalisation in super rich tax is also needed, he adds. "Last year, the Budget hiked surcharge rates for individuals due to which the highest tax rate has gone up to 42.74 per cent from 35.88 per cent which is a very high rate. Collection from such hike is expected to be very small," explained Mr Shah. "Hence, surcharge on income tax should be brought down."
Long Term Capital Gains tax
Besides personal income tax rates, many groups have been urging the government to cut personal income tax rates to spur demand and lift economic growth.
Long term capital gains tax was reintroduced in 2018 after a gap of 14 years. This tax is applicable on profits arising from the sale of applicable assets (such as equity, mutual funds and property) held for a period longer than one year from the date of purchase. In other words, before the Union Budget 2018-19, capital gains were tax-free on assets held for at least one year.
For example, a 10 per cent LTCG is applicable on sale worth more than Rs 1 lakh of equities and equity-oriented mutual funds held for more than one year.
Considering that the short-term (less than one year) capital gain tax on equity and mutual funds is 15 per cent at present, long-term capital gain tax is aimed at encouraging the investor to hold on to their securities for a longer period of time, say financial experts.
But is relaxation in LTCG tax on cards?
News agency Reuters reported earlier quoting a government official that a proposal to relax long-term capital gains on stock investments was under consideration, to attract investors.
"There are various suggestions, including completely removing it," the official said, adding the issue was discussed at the level of the Prime Minister's office. He said a final decision was still to be taken.
Financial experts say that any relaxation on the LTCG tax applicable to equities will promote market participation.
"More money in the hands of people is the only solution today," says investment adviser Sandip Sabharwal, adding that in his view, any big ticket announcements in personal taxes are unlikely in the Union Budget 2020.
"As people consume more it will create greater capacity utilization for corporates and that in turn will help in reviving the capex cycle as corporate cash flows have improved due to lower taxes and interest rates," says Mr Sabharwal, who expects a possible extension of the LTCG period to three years and "a zero tax beyond that".