Budget 2023 Expectations For Income Tax: 80C & 80D Limit Increase, Tax Slab Changes For Salaried Employees

The government will announce Union Budget 2023 on 1st February 2023 at 11:00 AM. This Budget announcement, the salaried individuals who account for nearly 50% of the income tax return filers are pinning high hopes that Finance Minister Nirmala Sitharaman would provide some major tax reliefs leaving them with higher disposable income.

While the world continues to grapple with the fear of recession and economic decline, including job losses due to layoffs, taxpayers have a lot of anticipation regarding this Budget. The government is expected to introduce many populist measures in this Budget as this is their last full Finance Budget before the 2024 Lok Sabha elections.

Earlier this month, Nirmala Sitharaman stated “I, too, belong to the middle class and can understand their pressures. I identify myself with the middle class, so I know”. She not only empathised with the middle class but also assured them that the government would consider their concerns. 

Changes In Tax Slab For Salaried Employees

The taxpayers are hoping that the current basic exemption limit of Rs. 2.5 lakh will be increased to Rs. 5 lakh under both tax regimes. The exemption limit of Rs 2.5 lakh has remained unchanged since FY 2014-15. The limit may be reevaluated based on various macro events, such as an increased cost of living, inflation, etc.

The current threshold of Rs. 10 lakhs for the 30% tax bracket may also be raised to Rs. 20 lakhs.

On the other hand, the new tax regime didn’t receive a good response from the taxpayer since many of the deductions must be foregone to avail of the benefit. Therefore, it is likely that a simpler tax system may be proposed merging both the tax regimes with additional deductions and exemptions.

Presently, the highest effective tax rate goes up to 42.744% for individuals earning more than Rs. 5 crore. This accounts for a major part of an individual’s income. The surcharge rates could be amended to increase the disposable income in the hands of taxpayers. 

80C and 80D Limit Increase

Deductions under Section 80C may also be enhanced from the current threshold of Rs. 1.5 lakhs. 80C is a major deduction claimed by individuals, consisting of many investment options, including National Savings Certificates, Public Provident Funds, home loan repayment, LIC Premiums, etc. 

Section 80C offers a Rs 1.5 lakhs deduction on a basket of investments, including investment in Public Provident Fund (PPF), National Savings Certificates, home loan repayment, investment in Sukanya Samridhi account, etc. A hike in the current threshold of Rs 1.5 lakhs to Rs. 2,50,000 can be anticipated,  increasing the disposable income in the hands of taxpayers. 80C also encourages individuals to invest in long-term instruments, which can help boost the economy.

Another major change taxpayers expect is an increase in the threshold for claiming deduction under Section 80D. Section 80D allows an individual to claim a deduction for payment of medical insurance premiums of up to Rs. 25,000. In the case of senior citizens, this threshold is Rs. 50,000. The COVID pandemic is poised to have financially affected people due to a sudden rise in medical expenses and insurance premiums. It has left the country with mounting medical debt. The government is expected to provide tax relief by revising the erstwhile limit of Rs 25,000/Rs 50,000 to Rs 50,000/Rs 1 lakh, respectively.

Standard Deduction

An increase in the standard deduction limit from Rs. 50,000 to Rs. 1 lakh may also be seen, which will increase the disposable income in the hands of the taxpayers. In the fiscal year 2018-19, the introduction of standard deduction led to the removal of tax-free medical reimbursements and travel allowance exemptions. Despite the deduction remaining the same, there has been a significant increase in medical expenses and fuel costs. Therefore, there is a strong argument for increasing the standard deduction from its current limit of Rs 50,000 to Rs 1 lakh. Additionally, extending the standard deduction under the new tax regime would be beneficial, as these expenses are unavoidable for any salaried taxpayer.

Home Loan Interest Rates

Currently, taxpayers can claim a deduction for interest paid on a home loan up to Rs. 2 lakhs. This limit may be revised as EMIs have skyrocketed in the last several months due to changes in the repo rate by RBI. This limit may also be provided under the new tax regime to make it more lucrative for taxpayers. A hike in this limit will also boost the real estate sector.

Surcharge Rate

Individuals who fall in the highest tax bracket (earning more that Rs. 5 crore p.a.) are charged an effective tax rate of 42.744%. This rate needs to be rationalized to ensure that there is higher disposable income in the hands of the taxpayer.

Enhancement Of Other Deductions

An increase in the threshold under Section 80TTA (Deduction on saving bank interest), 80EEA (interest on housing loan)  and  80EEB (electric vehicle loan) are also expected. Currently, an individual can claim a deduction of Rs. 10,000 on saving bank interest. The current lock-in on 80EEB to the electric vehicle sector maybe extended by 2 years.

Children's Education And Hostel Allowance

The Child Education Allowance, which currently provides exemptions of Rs 100 and Rs 300 per child per month for education and hostel expenses, has not been updated for nearly 20 years. With the rising cost of education, it may seem reasonable to raise the limits to Rs 1,000 and Rs 3,000 per child per month (for up to two children), respectively.

Amidst the tech layoffs and global recession, taxpayers are counting on this budget to get a sense of relief. The aim of this budget should be widening the tax base to grow tax revenues of the government along with providing adequate relief to the taxpayers.