5 Anticipated Income Tax Reforms in India's 2024 Budget

As February 1, 2024, approaches, all eyes are on the Union Government's interim budget presentation. Taxpayers across India, particularly those in the salaried bracket, are hopeful for changes that might ease the financial strain caused by rising costs of living. Here, we delve into the key income tax reforms that Indian taxpayers are eagerly anticipating in the upcoming budget.

Consider reading: New And Old Income Tax Regime Comparison Calculator: Choose The Best Tax Regime

Revised Tax Slabs

One of the most common demands of taxpayers is a revision of the income tax slabs that could either lower the tax rates or widen the income brackets. Currently, there are two tax regimes that taxpayers can choose from: the old regime with higher tax rates but more deductions and exemptions, and the new regime with lower tax rates but fewer deductions and exemptions.

The new regime was introduced in the Budget 2020, but it has not been widely adopted by taxpayers due to the loss of benefits under various sections of the Income Tax Act.

The taxpayers are hoping that the Finance Minister will either reduce the tax rates or increase the income thresholds under both regimes, to provide them more disposable income and boost consumption and investment.

For instance, some experts have suggested that the basic exemption limit, which is currently Rs 2.5 lakh for individuals below 60 years of age, should be increased to Rs 3.5 lakh. Similarly, the income tax rate for the income slab of Rs 10 lakh to Rs 20 lakh, which is currently 30% under both regimes, could be reduced to 20% or 25%.

These changes could benefit a large number of taxpayers and provide them with some insulation against inflation.

Enhanced Tax Rebate and Exemption Limits

Another expectation of the taxpayers is an increase in the tax rebate and exemption limit under various sections of the Income Tax Act. The tax rebate, which is currently Rs 12,500 for individuals with taxable income up to Rs 5 lakh, could be increased to Rs 15,000 or Rs 20,000, to provide more relief to the low-income earners.

The exemption limit under Section 80C, which is currently Rs 1.5 lakh for investments in various instruments such as provident fund, life insurance, mutual funds, etc., could be increased to Rs 2 lakh or Rs 2.5 lakh, to encourage more savings and investments.

The exemption limit under Section 80D, which is currently Rs 25,000 for health insurance premiums paid for self, spouse and dependent children, could be increased to Rs 50,000 or Rs 75,000, to promote health care and wellness. These changes could help taxpayers reduce their tax liability and increase their net income.

Capital Gains Tax Reforms

The capital gains tax regime is another area where the taxpayers are expecting some reforms and rationalization. The capital gains tax is levied on the profits made from the sale of capital assets such as property, shares, mutual funds, etc.

The capital gains are classified as long-term or short-term based on their holding period, and the tax rates vary accordingly. The taxpayers are hoping that the government will simplify and standardize the capital gains tax regime by streamlining the holding period, uniformity in tax rates, and change in the base year for indexation.

For instance, some experts have suggested that the holding period for long-term capital gains should be reduced from 24 months to 12 months for immovable property, and from 36 months to 12 months for debt mutual funds.

Similarly, the tax rate for long-term capital gains should be reduced from 20% to 10% for immovable property, and from 10% to 5% for equity mutual funds. These changes could make the capital gains tax regime more investor-friendly and attractive.

Life Insurance Incentives

The life insurance sector is another domain where the taxpayers are expecting some incentives and benefits from the Budget 2024. The life insurance penetration in India is very low, especially considering the large population and the protection gap.

To bridge this gap, the government could provide more tax benefits for the purchase of life insurance plans, such as unit-linked insurance plans (ULIPs) or traditional policies.

For instance, some experts have suggested that the individuals aged above 45 years should be granted a tax exemption if the premium to sum assured ratio is at least 1:7, in line with the IRDAI provisions. This would encourage more people to buy life insurance products and secure their financial future.

Boost for Research and Development

The research and development (R&D) sector is another sphere where taxpayers are expecting some support and incentives from Budget 2024. R&D activities are crucial for the innovation and growth of the economy, especially in the fields of science, technology, health, education, etc.

The government could provide more tax benefits for R&D activities, such as weighted deductions, tax holidays, concessional tax rates, etc. For instance, some experts have suggested that the weighted deduction for in-house R&D expenditure, which was reduced from 200% to 150% in the Budget 2023, should be restored to 200% or increased to 250%.

Similarly, the concessional tax rate of 15% for new manufacturing companies, which was introduced in Budget 2023, should be extended to new R&D companies as well. These changes could boost the R&D sector and enhance the competitiveness and productivity of the economy.

Final Thoughts on Income Tax Reforms in India's 2024 Budget

The 2024 Budget holds significant potential for impactful tax reforms. From revised tax slabs to R&D incentives, these anticipated changes could alleviate financial burdens and contribute to a higher standard of living. However, balancing fiscal health with growth is a delicate act, and only time will reveal the full extent of the reforms.

What income tax reform are you expecting in the 2024 budget? Let us know in the comments.

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