Pallavi: Welcome to the EY India Tax Insights Podcast. I'm your host for Pallavi, and we have a very special episode lined up for you today. With the India Union Budget 2024 just around the corner, there is a lot of anticipation and speculation about the changes we might see. To help us navigate through the possibilities, we aree joined by Sonu Iyer, Partner, People Advisory Services (Tax), EY India.
With over 30 years in the field, Sonu's expertise in tax, employment law, and HR consulting is unparalleled. She is a champion for Diversity & Inclusiveness and a key voice for reforms in India's tax and labor laws. As a member of the EY India Foundation Grant Committee, Sonu also helps drive community-focused initiatives. Get ready for an insightful conversation on what the new budget could hold.
Sonu, Thank you for joining us and we are delighted to have you in this episode.
Sonu Iyer: Many thanks, Pallavi, it is my pleasure to be here with you to discuss what the new budget would bring.
Pallavi: Thank you. Sonu. To dive right in. There is a lot of buzz around the potential changes in income tax slabs and tax rates for individuals. What are your thoughts on this?
Sonu Iyer: Yeah, that is right. There is a lot of expectation of a major change in the income tax regime that we currently have. To better explain this, let me first talk about what we have currently. Currently, we have two income tax regimes in place. One is the old tax regime, which includes all the deductions, and the other is the new tax regime, which was introduced by the government. Both co-exist. The new tax regime features a lower tax rate but no deductions or exemptions at all. We did see the standard deduction come into the new tax regime. However, what it is known for is a lower tax rate but without the deductions and exemptions available in the old tax regime.
In the old tax regime, taxpayers continue to get exemptions like interest on housing loans and deductions under sections like 80C (INR1,50,000), 80D, 80G, and 80TTA. These are not available under the new tax regime. Over the last few budgets, the finance minister has been urging people to move towards the new tax regime, but we have not seen a significant shift. This might be because people find that, due to the HRA and other deductions available, the old tax regime works out better for them.
In the old tax regime, the maximum amount of income not chargeable to tax is INR2.5 lakhs. For senior citizens, this goes up to INR3 lakhs, and for super senior citizens, it is even higher. Under the new tax regime, the maximum amount exempt from tax is INR3 lakhs across all age groups. The new tax regime features lower tax rates, such as 5% for income between INR3 lakhs and INR6 lakhs, 10% for ₹6 lakhs to ₹9 lakhs, and so on up to 30% for income above INR15 lakhs. A person with a total income of ₹7 lakhs and a rebate of INR25,000 does not pay any tax, although they must still file a return.
If the government introduces a unified tax regime, it could address some of the reasons why the new regime has not been widely adopted. This might include increasing the maximum amount of income not chargeable to tax to INR5 lakhs and widening the tax slabs. For instance, the 30% tax rate could apply to incomes of INR20 lakhs and above, reducing the tax burden for many. Additionally, individuals with total incomes up to INR10 lakhs might not have to pay any tax if the rebate is increased further.
This overhaul of the tax slabs, along with changing the rates and increasing the maximum amount of income exempt from tax, would benefit many taxpayers. It would also help the economy, as more disposable income would lead to increased spending and saving, thus stimulating economic activity. The government, with a GDP growth of over 8% and substantial dividends from the Reserve Bank of India, has the resources to take this leap towards a more unified and attractive tax regime in India.
Pallavi: Thank you Sonu. That will be a welcome change for many if implemented. Moving on to capital gains, what can taxpayers expect in this area?
Sonu Iyer:On capital gains: this is something that has been discussed every budget. All industry representatives, individual investors, and stock exchange representatives have been asking for some sort of rationalization in capital gains taxation for different asset classes. Today, there is variation in terms of the holding period and the rate of tax. The benefit of indexation for long-term capital gains tax also varies for different asset classes.
For example, when you sell a house today, you need to have held the house for more than two years to be eligible for the long-term capital gains tax rate of 20% and the benefit of indexation. If you have not held it for more than two years, you will be subject to short-term capital gains tax. For gold, the long-term capital gains tax benefit is only available if you have held the asset for more than three years. So, there is a variation: for housing, it is two years; for gold, it is three years.
If we look at Debt bonds acquired before 23 April, the holding period was three years with a 20% tax rate for long-term capital gains. However, for Debt bonds acquired after April 23rd, they are taxed as short-term capital, and there is no benefit of long-term capital gains. For equity shares listed on the stock exchange, the holding period is one year, and the tax rate is 10% after a certain threshold. For unlisted shares, the holding period must be two years, and they are taxed at 15% or 20% with the indexation benefit.
Equity-oriented mutual funds have a holding period of one year for a 10% taxation rate. The point here is that all these asset classes, which regular taxpayers typically have, have different holding periods, different rates of tax, and varying availability of the indexation benefit. This inconsistency leads to confusion, which can create gaps in compliance.
Therefore, there is an expectation for some sort of rationalization of capital gains taxation. Whether or not there will be any increase in long-term capital gains due to changes in rates, etc., remains to be seen, as this is always a tightrope walk. Any changes should be carefully considered, especially given the current buoyant market. These long-overdue changes should ideally happen soon.
Pallavi: Thank you, Sonu, for this insight. Now, regarding the other tax relief measures, what prospects and possibilities are on the horizon?
Sonu Iyer: Pallavi, when you asked me this question, I looked back from the perspective of the Prime Minister's vision for a developed India, or Viksit Bharat, by 2047. One of the key aspects of a Viksit Bharat is an attractive personal tax regime. This is essential because we need to retain our bright minds and entrepreneurs in India. They will stay or return to India if we have a personal tax regime that motivates them to operate from India, pay taxes here, and find it easier to do so.
Thus, it has to be a major policy initiative with a determination to make the personal tax regime attractive. Many successful economies have retained their talent by having an appealing tax regime. Any revenue loss from personal tax should be mitigated through macroeconomic or microeconomic interventions. For instance, increasing the securities transaction tax, which is currently very low, could marginally boost revenue by capitalizing on the high volumes of stock exchange transactions. Additionally, a nominal increase in GST could offset the benefits passed on through the personal tax regime.
From this perspective, I hope the government aligns its strategies with its vision of building a global financial hub in India. This includes retaining entrepreneurial talent, encouraging skill upgradation, and fostering innovation, all supported by a beneficial personal tax regime.
I believe some of these ideas should also be on the Finance Minister's mind, and we might see some of them implemented as well.
Pallavi: Thank you. Sonu. And finally, the rationalization of direct taxes is always a delicate balance. So how do you think the government will approach this while trying to balance the revenue?
Sonu Iyer: Right. So, as I mentioned earlier, I have a great answer on this. Today, I believe we are in the best possible position to implement some of the suggestions. This is because the RBI dividend is with the government, which is also benefiting from increased GST collections. We are also seeing GDP growth of over 8%. Even if we predict a GDP growth of over 7%, there is a buoyancy in the Indian economy that we can hopefully build on.
The loss can be offset by making these changes. If we successfully create an entrepreneurial culture, build innovation hubs, and establish financial hubs in India, we will attract much more capital. This can mitigate any revenue loss very easily. We can set a time horizon of two to five years, during which other macroeconomic factors will help collect revenue, rather than relying on a small minority of taxpayers to fund these initiatives. I am very hopeful that these macroeconomic interventions can help the government offset the loss of revenue.
Additionally, creating more white-collar jobs and advancing the value chain of service exports leaves more income in the hands of people. This helps the economy as people have more money to spend in the market and seek investments, serving multiple purposes. Therefore, I believe now is the best time to move forward with these initiatives.
Pallavi: Thank you. Sonu, thank you for sharing those valuable Insights on what we can expect from the Union Budget 2024. It is certainly going to be interesting time for taxpayers and professionals alike. Thanks.
Sonu Iyer: Thanks, Pallavi. Keep in mind that, you know, the interim budget, expectations were rolled over to the final budget of 2024. So, a lot of people are expecting the finance minister to present a blockbuster budget, at least from that personal tax standpoint.
So, we will wait and see what happens. Thank you very much for having me. It has been a real pleasure talking to you.
Pallavi: Thank you. Thank you. Sonu. And with that, we wrap today's episode. thank you to all our listeners for tuning in today. Stay informed about the Union Budget 2024 with Iva India Tax insight. Until next time.
This is Pallavi signing off.
