The Union Budget 2023 is round the corner. Are you ready with your wish list? What do you want from this budget? Lower taxes? Higher tax deductions? Additional tax exemptions? The Budget announcements may not meet all your demands/wishes since the Government must strike the right balance between populism, targeted incentives, and tax collections. Still, there is nothing wrong in wishing for favorable changes.
In this post, I shall share a few points that will be on the wish lists of many taxpayers.
Section 80C Limit of Rs 1.5 Lacs Is Not Enough
Just look at the list of investments/expenses that qualify for tax benefit under Section 80C.
- Employee Provident Fund (EPF)
- Public Provident Fund (PPF)
- Sukanya Samriddhi Scheme (SSY)
- Life Insurance (Term, ULIPs, and Traditional Life Insurance plans)
- National Savings Certificate (NSC)
- Senior Citizens Savings Scheme (SCSS)
- 5-year Tax saver bank fixed deposits
- ELSS (Tax-saving mutual funds)
- Tuition fee
- Home loan principal repayment
- And many more…
The list is so wide that many taxpayers invest/spend much more than Rs 1.5 lacs per financial year on the Section 80C items. A hike in this limit will result in easy tax-savings for the taxpayers. They are already spending money under these heads. Hence, no need for any additional investment/expense to benefit from the limit hike.
Higher Deduction for Health Insurance Premiums
Healthcare costs are rising. Any who has been hospitalized recently or has borne the hospital bills for a family member recently can bear testimony to this. People can now see the merit in buying health insurance plans and appreciate how such insurance plans can not only ensure quality healthcare for the family but also save the family from financial ruin in case of a prolonged hospitalization.
However, health insurance plans are not cheap. A cover of Rs 10-15 lacs for a family of 4 can easily cost 30,000-40,000 per annum. This is no small change. And the health insurance premiums usually go up every year or every few years. Notwithstanding the immense benefits of buying health insurance, this premium is a big burden on customer pockets.
The Government offers tax benefit on health insurance premium payments of up to Rs 25,000 per annum under Section 80D of the Income Tax Act. As discussed above, the premium can be much higher. The taxpayers would welcome a hike in Section 80D limit from Rs 25,000 to Rs 50,000 per annum.
The Government can also lower the cost of health insurance by reducing the GST charged on health insurance policies. The current GST rate is 18%.
Bigger Tax Relief for Home Loan Interest Payment under Section 24
Higher residential real estate prices —> Bigger home loans —> Bigger Home Loan EMIs
Given how loan mathematics works, a major portion of the EMI goes towards interest payment in the initial years.
For instance, a Rs 75 lac loan at 9% p.a. for 20 years would have an EMI of Rs 67,479.
| Years | Principal Repayment | Interest Payment |
| Year 1 | 140,453 | 669,300 |
| Year 2 | 153,629 | 656,125 |
| Year 3 | 168,040 | 641,713 |
| Year 4 | 183,804 | 625,950 |
| Year 5 | 201,046 | 608,708 |
As you can see, during the initial years, the interest component of the EMI is quite high.
However, the tax benefit for interest on home loan repayment for self-occupied property is capped at Rs 2 lacs. Given the size of home loans, the tax relief is too small. While there is a provision to carry forward excess interest (loss under Income from House Property), you need this benefit the most in the initial years. Why?
Because many borrowers purchase their homes in their late 20s and 30s and their incomes are yet to peak. A tax relief would help the most when the income is low.
Home loan borrowers would welcome a hike in deduction for home loan interest under Section 24 from Rs 2 lacs to at least 3-4 lacs per annum.
This would require change to both Section 24 (which specifies the deduction limit) and Section 71 (which caps the inter-head set off for loss under Income from House Property at Rs 2 lacs per annum).
Lower Taxes and a Simpler Tax Regime
We will continue to root for lower taxes until the tax rates go to zero. Yeh dil maange more. There has already been a lot of rationalization as far as tax levels are concerned. For instance, 10% tax slab has been replaced by 5%. Would not expect much relief here. However, the Government can certainly simplify the tax structure. It is unnecessarily complex.
There are 2 tax regimes. The old regime has higher tax rates but allows tax deductions. The new regime has lower tax rates but does not allow tax deductions. The problem is that there is not much difference in tax liability across the two regimes. Hence, the Govt. should either reduce tax rates in the new tax regime or just have one regime.
The minimum tax exemption limit is Rs 2.5 lacs. If your income is below Rs 5 lacs, you get a tax rebate under Section 87A which makes your entire income tax-free. However, if your income is more than Rs 5 lacs, then, you pay 5% tax for the income between Rs 2.5 lacs and Rs 5 lacs. Why complicate so much? Just make income up to Rs 5 lacs tax-free for everyone.
The long-term holding period for stocks and equity funds is 1 year. 2 years for residential real estate and 3 years for debt funds and gold. There is no indexation benefit for LTCG on stocks and equity mutual funds. Other capital assets get this benefit. It would help to have the same long-term holding period across all the assets and extend the same indexation benefit to all the asset classes.
Note: The Government decisions are not irrational. There is a method to this madness. For instance, the new tax regime is actually quite simple and does not require investors to make any tax-saving investments. The taxpayers have more flexibility with their money. The tax rebate under Section 87A is to help taxpayers who earn less (and not everyone). Lower long-term holding period for equity investments and lower tax on LTCG (albeit without indexation) is to incentivize equity investments. Same with long-term holding period for real estate. Just that over the years, these exceptions have piled up and made the tax structure complex. Simplification would help even though it might increase tax impact on some investors.
Increase PPF Investment Limit
PPF is one of the finest fixed income products for the long-term portfolio. Unlike EPF, which is available to only salaried employees, PPF is open to all and is an investor favourite for tax-saving and wealth creation.
PPF investment carries no risk and fetches tax benefit on investment under Section 80C. PPF interest and maturity amount are also exempt from tax. What else could you ask for?
The only problem is that there is a cap on annual investment in PPF. You cannot invest more than Rs 1.5 lacs per annum in PPF. The investors would welcome an enhancement in the PPF limit from Rs 1.5 lacs per annum to at least Rs 2 lacs per annum.
At a time when the Government has started taxing EPF contributions above a threshold, this seems too much to ask for.
No Capital Gains Tax While Switching from Regular Plan to Direct Plan of the Same Scheme
Every mutual fund scheme is available in 2 variants. Regular and Direct. The two variants have the exact same portfolio and the fund manager. The only difference is the cost. Regular plans are more expensive than direct plans. Higher expense ratios in regular plans lead to lower returns for the investors (compared to direct plans).
Currently, if you want to switch from the regular plan of X scheme to the direct plan of Y scheme, this results in capital gains tax liability since a switch transaction is a sale transaction followed by a purchase transaction. This prevents investors from switching their regular MF investments to direct quickly.
The Do-it-yourself (DIY) investors would welcome any Government proposal that could waive off the capital gains tax liability due to switching from regular plan to direct plan of the same (and not different) scheme. Would be unfair if such DIY investors expect a complete waiver here. Only the switch transaction should not trigger tax liability. When the direct variant is eventually sold, the original purchase cost of the regular plan investment should be considered while calculating capital gains.