Budget 2024: 4 Highly Expected Proposals In Income Tax Rates

Taxpayers expect significant developments from the upcoming Budget 2024, which will be unveiled at the commencement of the Modi Government's third term. In addition to the anticipated reduction in income tax rates and the raising of the income threshold to Rs 5 lakh, both of which are going to greatly benefit the middle class, the following are the main expectations made by CA (Dr.) Suresh Surana regarding the income tax rate changes in the upcoming budget.

Impact of Budget Announcements on Income Tax Rates

Based on an interview with CA (Dr.) Suresh Surana, here are some of the expected changes in the Income tax rates w.r.t. the upcoming budget are as follows:

1. Proposal to Increase Basic Exemption Limit to Rs. 3.50 Lakh

The Union Budget may propose to raise the basic exemption limit from the current Rs. 2,50,000 to Rs. 3,50,000. This adjustment may take into account inflationary pressures and the absence of revisions to the basic exemption limit since the Union Budget of 2014.

Individual taxpayers under the slab rate system currently benefit from a basic exemption limit of Rs. 2,50,000, which has remained unchanged for several years. Given the year-on-year increase in inflation and the consequent rise in the cost of living, it is anticipated that the Union Budget 2024 will introduce an increase to Rs. 3,50,000. This adjustment aims to provide relief to taxpayers and align the exemption limit more closely with prevailing economic conditions.

2. Proposal to Standardize Long-Term Capital Gains Taxation at 15%

The Union Budget may propose to rationalize long-term capital gains taxation by setting a uniform rate of 15% for all assets, except listed shares, and establishing a consistent holding period of 24 months for other assets.

Under current Income Tax Act provisions, capital gains are categorized as either long term or short term based on the holding period of the asset, which ranges from 12 to 36 months depending on the asset type. For instance, listed shares and equity-oriented mutual fund units have a 12-month threshold, while unlisted shares and immovable property require a 24-month holding period. Debt-oriented mutual funds have a 36-month holding period. Moreover, different tax rates apply to long-term capital gains (LTCG) depending on the asset type, creating complexity.

In order to simplify the tax structure and reduce complexity for taxpayers, it is proposed to standardize the holding period for all non-listed equity assets from 36 months to 24 months. Additionally, the LTCG tax rate should be capped at 15% for these assets, excluding those covered under sections 112A and 111A (such as listed equity shares, equity mutual fund units, and business trust units). This reform aims to streamline tax compliance and enhance clarity in capital gains taxation across different asset classes.

3. Proposal to Tax Dividends at 20% for Resident Shareholders

Currently, under the optional concessional corporate tax regime, the corporate tax rate has been reduced to 22% plus surcharge and cess, resulting in an effective tax rate of 25.17% in most cases. However, dividends distributed by Indian companies are taxed again in the hands of shareholders. Non-resident shareholders are subject to a dividend tax rate of 20% plus surcharge and cess under the IT Act (subject to the benefit of lower tax rate, if any, under Double Taxation Avoidance Agreements).

In contrast, dividends received by resident individuals, HUFs, partnership firms, and LLPs are taxed at slab rates, which can go up to 35.88%. To address this disparity and encourage investment, it is proposed to align the dividend tax rate for resident shareholders with that of non-residents.

4. Proposal to Restrict the Highest Income Tax Bracket to 39%

The Finance Act 2024 proposed to cap the maximum rate of surcharge from 37% to 25% for taxpayers opting for concessional tax regime u/s 115BAC of the IT Act. This effectively brought down the highest tax rate to 39% (derived as: 30%-Basic Tax plus 25%-Surcharge plus 4% Cess) for taxpayers opting for the new regime - which is now the default regime. Accordingly, it is expected that the Union Budget 2024 may propose to eliminate the current highest income tax slab of 42.7% in the old tax regime and restrict it to 39%. This adjustment is motivated by the fact that only a small proportion of taxpayers fall into this category.

Comparatively, in several developing economies such as Thailand, Indonesia, Malaysia, Philippines, Vietnam, etc., the highest tax rates for individuals are significantly lower than those in India. Hence, capping the highest tax bracket at 39% is expected to simplify the personal tax structure. This adjustment aims to incentivize reduced tax rates and align more closely with the simplified tax rates applied to corporations.