[Opinion] Salaried Employees – Longing for Tax Relief from Union Budget 2023

Authored by Sudeep Das & Ashwath Pai – Chartered Accountant

Every passing year provides salaried individuals with a greater sense of anticipation as to what the upcoming Union Budget proposals would unfold in terms of tax reliefs – reduction of tax rates/ extension of tax slabs, increase in deductions, simplification of compliance procedures etc. This year would not be any different, and perhaps the expectations are higher given the General elections are just a year away.

In a move which has been widely appreciated, Hon’ble Finance Minister reduced the effective tax rate for domestic corporates from 34.94% to 25.17% from tax year 2019-20 (for certain companies the effective tax rate has been reduced to 17.16%). Such reduction in tax rates have provided much needed uplift to India Inc. The lowering of rates has seen the tax base of the Government widening, resulting in higher direct tax collections for the Government.

However, in contrast to the above, a salaried individual is liable to tax at rates as high as 42.74%. The gap between the tax rates is significant and alignment of individual tax rates/ slabs in the upcoming budget would provide much needed boost to consumption; thereby leading to expansion in economic growth.

We have penned down certain thoughts through which such changes can be put into effect:

I. Enhancement of Standard deduction: Salaried employees are currently allowed standard deduction of INR 50,000 to cover expenses incurred during the course of employment. This in lieu of numerous expenses that the employees incur during the course employment which they cannot claim as deduction. For instance, if a self-employed proprietor would buy a car to commute to his place of work and for other business purposes, he would be able to claim the depreciation on such car and other recurring expenses on petrol and maintenance while arriving at his taxable business income. However, a salaried individual would not be eligible to claim such expenses as deduction from his taxable income.

Given the above and considering the sky-rocketing inflation, an increase in such deduction from INR 50,000 to a higher sum in the upcoming budget is highly anticipated. Further, such deduction should be revised on regular intervals basis the increase in the cost of living and maybe linked basis the increase in the CPI Inflation data.

II. Deduction for certain expenses: Post the pandemic, a lot of employees are now working in a hybrid model wherein they are going to office for 2-3 days in a week. Although such models are a convenient option and provides flexibility to employees, it requires investments like setting up broadband/ internet connection, purchase of office infrastructure etc. Further, there are recurring expenses on electricity, broadband charges, etc.

It is suggested that exemptions should be provided to employees for amounts spent on set up of home office infrastructure – chairs, desk, broadband connections etc. which could be claimed through employer, upon submission of documents relating to purchases made for carrying out official work.

Further for recurring nature of expenses additional deduction of certain sum per month/ annual limit could be introduced through a reimbursement mechanism.

III. Increasing the limit for deduction under Section 80C: The deduction under Section 80C of the Income-tax Act, 1961 (ITA) available for investments towards life insurance premium, equity linked savings schemes, contribution to provident fund etc. is limited to INR 150,000 and was last revised through Finance Act, 2014. To provide a perspective, the Cost inflation index (CII) used in income-tax for calculation of capital gains was 254 for the tax year 2015-16 and 331 for the tax year 2022-23.

Thereby, it is the need of the hour to increase such limit to atleast INR 300,000. This would not only result in higher savings for employees but would also enhance spending in saving schemes including infrastructure deployment, along with increased spending in insurance products which is currently very less compared to the most developed nations.

IV. Upward revision of INR 200,000 for interest deduction on monies borrowed against house property: Currently, the deduction for interest on housing loan paid has been capped at INR 200,000; the same was last revised with effect from 01 April 2015. The prices of residential properties have soared multi-fold during the last few years given high inflationary environment and rising demand of properties. Further, the home loan interest rates have been on an upward trend due to the increasing repo rates. This has led to increase in the equated monthly instalments (EMIs) wherein the interest liability is substantial, especially during the initial years. Such interest is allowable as deduction from income from house property up to the limit of INR 2,00,000.

To provide some relief for enhanced interest costs, the finance ministry should raise the deduction limit in the upcoming Union Budget for interest payment on housing loans to atleast INR 400,000. This should help enhance demand in real estate sector and would indirectly reduce cost of buying a house.

V. Resolving disparity in dividend taxation:Domestic investors including the retail investors turned saviours for the Indian equity market in 2022 amid aggressive selling by foreign investors. The change in investing style of Indian investors towards capital market is evident by the increasing inflows through SIPs in equity mutual funds in recent years. However, there is disparity when it comes to taxation of dividend income earned by such resident shareholders vis-a-vis the non-resident shareholders.

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Any dividend income received by ‘non-resident’ shareholder is taxable on gross basis, at the rate of 20% plus applicable surcharge and 4% health and education cess. Further, non-resident shareholders can explore the beneficial provisions of the Double Taxation Avoidance Agreement (DTAA) between India and the other country which provides for lower rate of tax on such dividend income, subject to prescribed conditions.

However, in case of a shareholder qualifying as a “resident”, dividend income is taxable at the applicable slab rates, which means dividend income could be subject to tax rate of 30% plus applicable surcharge and 4% health and education cess.
To resolve disparity, it is recommended that a blanket rate of tax @ 20% (plus surcharge and cess) may be provided in upcoming budget for resident shareholders similar that of non-resident shareholders.

Concluding Thoughts

The above proposals if agreed to in the upcoming Budget are lucrative from a salaried taxpayers’ perspective as it would lead to higher incomes and could lead to long-term saving and investment flows in their hands. Further, higher in-hand salary would also boost spending and therefore contribute to the wider economy. As the countdown approaches to 01 February, it would be interesting to see as to how the expectations of the salaried class are provided for in the upcoming budget proposals.

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