Union Budget 2023 | Enhancing Section 115BAC to Boost Tax Savings

As the 2023 Union Budget approaches, there is a lot of speculation about what it will contain in terms of relief measures for taxpayers. In the past, budgets have included benefits such as deductions and exemptions. Still, these often come with many conditions and limitations that make it difficult for taxpayers to take advantage of them. To address this issue, the 2020 Budget introduced a simplified alternative regime in Section 115BAC. of the Income-tax Act, 1961. This option allows individuals and Hindu Undivided Families (HUFs) to pay taxes at a reduced rate, but with the trade-off of giving up certain exemptions and deductions.

When choosing this option, taxpayers cannot claim exemptions or deductions such as the standard deduction from salary, and deductions under Section 80C, 80D, or 80TTA, among others. This new regime was introduced to make the tax system more simplified and easier to navigate for taxpayers. The government aims to reduce the compliance burden on taxpayers by reducing the number of exemptions and deductions that are currently available. This will also help to increase the tax base, as more taxpayers will be brought under the tax net.

The 2020 Budget also brought several other measures to simplify the tax system and reduce the compliance burden on taxpayers. For example, the Budget 2020 increased the threshold limit for tax audits under section 44AB from Rs 1 crore to Rs 5 crore for businesses [Now the limit is 10 crores]. This results in a reduction in the number of taxpayers who are required to get their accounts audited.

Overall, the Government aims to make the tax system more straightforward, transparent, and easy to comply with. Introducing the simplified alternative regime in Section 115BAC is a step in the right direction. More such measures are expected to be proposed in the 2023 Union Budget. The government is also likely to propose measures to reduce the compliance burden on taxpayers by simplifying the tax laws and reducing the number of exemptions and deductions available. This will make it easier for taxpayers to navigate the tax system and take advantage of the available benefits.

Introducing Section 115BAC in the 2020 Union Budget was a step towards simplifying the tax system and making it more accessible for a larger group of taxpayers. However, many taxpayers have hesitated to opt for this simpler regime despite its potential benefits due to the lack of basic tax deductions and exemptions. Ordinary expenses such as housing loan repayment, children’s tuition, and life and medical insurance for one’s family are not eligible for tax benefits under this regime, making it less attractive to taxpayers.

To make this alternative tax regime more appealing, it would be beneficial for the government to consider including tax deductions for those who choose it. This could include deductions for essential expenses such as housing loan repayment, children’s tuition, and life and medical insurance for one’s family. These deductions would provide taxpayers with the necessary incentives to opt for the simpler regime, making it a more viable option for them. Furthermore, it would help them lower their tax liability and make their tax compliance more manageable.

Additionally, it would benefit the government to consider providing additional incentives for taxpayers who choose the simpler regime. This could include lower tax rates or even a complete waiver of taxes for a specific income range. This would not only encourage more taxpayers to opt for the simpler regime but also provide much-needed relief to those struggling financially.

In conclusion, despite the government’s efforts to simplify the tax system, the lack of basic tax deductions and exemptions under the alternative tax regime has made it less attractive to taxpayers. However, by including tax deductions and providing additional incentives, the government could make this simpler regime more appealing to taxpayers and increase the number of taxpayers who choose it. This would ultimately lead to a more efficient and effective tax system, with a larger tax base and a more manageable compliance burden on taxpayers.

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To enhance the appeal of Section 115BAC and make it more beneficial for taxpayers, the following exemptions and deductions should be considered:

1. To make Section 115BAC more beneficial for taxpayers, the government should consider providing a deduction under Section 80C for expenses such as life insurance, education, housing loan repayment, and pension funds, with a maximum claimable amount of Rs. 1,50,000. This would give taxpayers the necessary incentives to opt for the simpler regime and help them lower their tax liability.

2. Another way to make the alternative tax regime more appealing is to provide a deduction under Section 80D for medical insurance premiums and expenses. This would be particularly beneficial for taxpayers who have dependents, as it would help them cover the medical expenses for themselves and their family members.

3. A further way to enhance the appeal of Section 115BAC is to provide a deduction under Section 80TTA/80TTB for interest earned on savings account deposits and term deposits, with a maximum claimable amount of Rs. 10,000 and Rs. 50,000, respectively.

4. Another way to make the alternative tax regime more appealing is to provide a standard deduction under Section 16 of Rs. 50,000 for individuals earning salary income.

5. To make Section 115BAC more beneficial for taxpayers, the government should consider providing a deduction under Section 24 for the interest component of loans taken for the acquisition, construction, or reconstruction of a house property, with a maximum claimable amount of Rs. 2,00,000 for a self-occupied property.

6. Another way to make the alternative tax regime more appealing is to provide an exemption for House Rent Allowance (HRA) for employees who reside in a rented house. Salaried employees commonly claim this as HRA is a component of their salary used to cover the cost of the rent.

In conclusion, while Section 115BAC was designed to simplify the tax system and make it more accessible for a larger group of taxpayers, it currently lacks enough tax exemptions and deductions to make it truly beneficial for taxpayers. To address this, it is recommended that the government consider adding common tax exemptions and deductions to Section 115BAC. These exemptions would significantly reduce the tax burden on taxpayers, allowing them to retain more of their income. Additionally, to make Section 115BAC even more appealing, the government may consider implementing a basic exemption limit of Rs. 5 lakhs and applying the highest slab of 30% only to taxable income above Rs. 20 lakhs. These changes would make Section 115BAC a more viable option for taxpayers and lead to a more efficient and effective tax system.

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