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Podcast host Silloo Jangalwala, Associate Director, BMC, speaks to Sonu Iyer, tax partner and national leader, People Advisory Services, EY India about the personal income Tax announcements in Union Budget 2023-24.
Background:
In Budget 2023, personal taxation was in the limelight. Fiscal prudence continued to be the guiding mantra for the Finance Minister while staying on the path of simplification and stability in income tax rates. The Finance Minister addressed two key priorities: the demand from the middle class on income tax relief and to make the new tax rate regime more attractive.
Key takeaways
Those with a total income of INR7 lakh will not pay any taxes in the new tax regime. This is expected to boost consumption in the economy and help the low-income category.
The concessional tax regime aims to reduce the maximum marginal tax rate to 39% from 42.744% by lowering the surcharge on incomes over INR5 crore to 25%.
Along with other income tax benefits, the government has made the new tax regime more attractive.
The number of commissioners is expected to increase, which will expedite disposition of appeals. There is a clear focus on enhancing taxpayer experience.
The government is clear that this will now be the default tax regime. I personally see this as paving the way toward a simplified and unified tax regime. It may happen next year or after that. But they are moving toward a simplified tax regime with no or minimal deductions, as is the case in the new proposed concessional tax regime.
Sonu Iyer
Partner & National Leader – People Advisory Services, EY India
For your convenience, a full text transcript of this podcast is available below:
Silloo: Welcome to the EY podcast series on the Union Budget 2023. In this session, we will discuss personal income tax announcements. Nirmala Sitharaman, the Finance Minister of India said in her speech on 1 February that personal income tax proposals are the ones that everyone waits for, and that is absolutely true, since they dictate the amount of our salaries we can take home and spend. Hi everyone, I am Silloo, and I have with me today, Sonu Iyer, EY India Tax Partner and National Leader for People Advisory Services.
Sonu is the person everyone makes a beeline for when they want to understand the implications of any tax proposal on their compensation. Thank you very much, Sonu, for sparing your valuable time and joining us today.
Sonu: Hi Silloo, lovely to be here. I look forward to our interaction.
Silloo: Thanks, Sonu. Let us start with your overall view on the changes to the personal taxes.
Sonu: Overall, fiscal prudence continues to be the mantra guiding the FM, and it is no different in the personal tax proposals. She has done a very good balancing act, I would say, to cater to popular demand while staying on the path of simplification and stability in income tax rates to ensure that we are headed toward a flatter and a simpler tax structure.
A big change, which we were expecting and put out from an EY perspective, was changes to the concessional tax regime — it was also a major budget expectation on the personal income tax front. They had introduced it way back in April 2020, but it did not really take off. The FM has certainly made good changes, and we expect that many people will move to the new upgraded concessional tax regime or the new tax regime with the current budget proposals. She has brought in a standard deduction, which was a popular demand from salary income earners, if they were to consider a switch.
Apart from the standard deduction of INR 50,000 for all salaried income earners, the tax slabs have changed; and the maximum amount of income not chargeable to tax has increased from INR2.5 lakh to INR3 lakh. She has widened the tax slabs and lowered the tax rates. The tax slab change by itself will give savings of about a lakh. Of course, the implication will be income-specific, but the slab rule change itself is making that impact. With this, the concessional tax regime also brings in a tax rebate. So, people who currently have total income up to INR5 lakh, do not pay income tax because they have a rebate under Section 87A, in addition to the maximum income not chargeable to tax of INR2.5 lakh.
Similarly, the FM has enhanced the rebate provisions from INR5 lakh under Section 87A to INR 7 lakh. This means that if you have a total income of INR7 lakh, you do not pay any tax at all.
While some will consider this as a populist measure, I think it is a very good measure given the inflation, the need to increase consumption in the economy, and the help it gives to the low-income category.
Another good change proposed in the concessional tax regime is to bring down the maximum marginal rate of tax, which stands at 42.744%, to 39% by lowering the surcharge on incomes over INR5 crore to 25%. This will mean that people with incomes over INR5 crore will consider moving to the new concessional tax regime.
These are some of the big changes that will lead to a greater uptake of the new tax regime.
There are some other personal income tax proposals as well, which the finance minister tabled. This includes increasing the one-time leave encashment exemption that is available on retirement superannuation, from the existing INR3 lakh to INR25 lakh.
Silloo: Sonu, while you did briefly touch upon this, do you think that since most of the big incentives are only available to those in the new tax regime, people will adopt the new tax regime? At present, most people are filing their taxes under the old tax regime.
Sonu: Yes, absolutely. I think this will give a major push to many taxpayers to evaluate switching to the new tax regime. It makes sense for people whose income is up to INR50 lakh to compare the deductions they claim on the existing tax regime versus the benefits of the tax slabs under the new concessional tax regime.
Those whose incomes are over INR5 crore, while there may not be too many taxpayers in that category, but they should also consider switching to the new concessional tax regime. These changes are only in the concessional tax regime. Lower surcharges are not being given in the existing tax regime.
The government is very clear, and the Finance Minister also made the point, that this will now be the default tax regime. I personally see this (measure) paving the way toward a simplified and unified tax regime. This may happen next year or after that, but the movement is toward a simplified tax regime with no or minimal deductions, as it is in the new proposed concessional tax regime.
Silloo: This brings me to my next question. What are the changes proposed in Section 54?
Sonu: Section 54 is one of the favorites with all taxpayers because you sell a house property and you invest in another house property, which exempts your entire capital gains. Or you sell any other long-term asset under Section 54F and buy a residential house property with the proceeds. The entire transaction is tax free.
The Finance Minister noted in her speech that people were using this to do massive stake sales and investing that money in high-end residential properties. Now, what the government has done, very sensibly, is look particularly at the very high-value transactions. What they are saying is that they will cap the benefit to INR10 crore.
This will impact luxury real estate, where people were investing the proceeds from the sale of any long-term capital asset. Or, in cases of residential housing, they were investing in another luxury property.
To that extent, luxury real estate will be hit but it does not impact the middle class or the taxpayer base in general. It impacts only the high net-worth individuals (HNIs), who would be investing in luxury apartments or real estate of over INR10 crore.
Silloo: In your opinion, will the income tax announcements lead to a big boost in consumption?
Sonu: All these measures give relief in taxes. So, there will be additional money in the hands of the people and consumption should get a boost. The government’s focus is on increasing consumption, giving an impetus to growth, as well as ensuring savings.
That is the reason behind the measures announced for senior citizens. At present, deposits of INR15 lakh in Senior Citizens’ Savings Scheme get an interest rate of 7.4%. To cheer senior citizens, these savings can be doubled to INR30 lakh. That is a benefit for senior citizens.
Savings for women have also been encouraged. If women invest in a fixed deposit for the next two years, they will get a fixed rate of interest, which is capped at 7.5%.
My point is that the government is playing a balancing act. It is encouraging savings but also consumption because we know that consumption will lead to demand and demand will create a reason for the economy to grow.d
Silloo: Lastly, Sonu, I understand that there are some changes to the TCS (tax collection at source) (TCS) on foreign remittances. Would you like to talk about these and any other proposals that impact personal finance?
Sonu: Clearly, the government wants to be able to keep an eye on foreign remittances by resident Indians. If you look at it, they had introduced such provisions earlier as well when TCS was collected on foreign remittances, specifically on medical. Remittance for education would be subject to a tax of 0.5% after a threshold of INR7 lakh. So, if you were remitting money for education but it was more than INR7 lakh, there would be a TCS of 0.5%. And if it was for the purpose of medical treatment, then the threshold was INR7 lakh with TCS of 5%. They have not made any changes to that. But for any other remittance, be it for investment or to buy an overseas tourism package, the applicable TCS will be 20% and there is no threshold. So, if you are spending, say, INR1 lakh, the TCS is still 20%.
But TCS is not tax lost. It helps the government track it. TCS may create cash flow issues, but ultimately you are able to get a credit for it and adjust your total tax liability. So, while tax is collected at source, it is credited in your name. To that extent, it is not a major damaging factor.
An interesting change has been seen in life insurance. Money received from life insurance policies with a premium of more than INR5 lakh, except in the event of death, will now be taxable. This means that repayment of insurance policies on maturity, where the premium is more than INR5 lakh, will be considered taxable, except that you would be able to get a deduction for the premium if you have not already claimed it under Section 80C. This is a change to note for people who invest in life insurance policies.
Another interesting point from a personal finance perspective is in housing loans. People who would have housing loans and are paying interest, get a deduction for the interest under Section 80C. If they sell their property for the cost of acquisition, some people, were able to add the interest component to the cost and get the benefit of lower capital gains because they were enhancing the cost of acquisition with the actual purchase price plus the interest paid on the loan. The government has stepped in to say no to such double deductions.
If you have taken a deduction for the interest paid on a housing loan, you do not get to add it to the cost of acquisition. To that extent, this is rationalization of the provision.
Moreover, the government has said that market-linked debentures are more like derivatives and should therefore be taxed at the normal slab rate. This means you do not get the preferred rate of 10% without indexation, which taxpayers can currently claim.
There are some other encouraging aspects, such as a unified filing process, to eliminate the need to give IDs and KYC at multiple points. Also, for those who were not furnishing their PAN when withdrawing from Provident Fund, the TDS applied was at the maximum marginal rate of tax. Now, the applicable TDS rate would be 20% instead of the maximum marginal rate. Therefore, this is again a rationalization.
The other things that the Finance Minister touched about in the Budget on improving taxpayer experience are also encouraging. We will see measures taken to strengthen the grievance redressal mechanism.
She also talked about the speed of processing tax returns and adding to the number of commissioners to expedite the disposition of appeals. Overall, there is a very clear focus on enhancing taxpayer experience, which I find very encouraging because this means that taxpayers’ contribution to the nation is being considered and the government is focused on giving them the right service.
Silloo, another change mentioned is the Finance Minister's speech, is encouraging electronic gold. The government will not treat the conversion of physical form of gold into electronic gold receipts and vice versa as a transfer for the purpose of capital gains. The period of holding will include the period for which the owner held the gold in the physical form. So, this is also an interesting change, and it will encourage people to move from physical gold to electronic gold receipts.
Silloo, I would like to add that there is always a lot more in the fine print. At the time of our recording, we are talking about some of the provisions. There is a lot more in the budget’s fine print, which will come through in some time.
Silloo: An excellent overview, Sonu. Thank you for your time today. This was a great conversation with several insights and lots of useful information and I am sure that it has given a lot of clarity to our listeners. Thanks once again.
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