Union Budget 2024 and the taxpayer: Higher basic exemption limits, more medical deductions needed

While the government raised the tax rebate limit from Rs 5 lakh to Rs 7 lakh under the new tax regime last year, there is a case for increasing the basic exemption limit under both tax regimes, experts said.

Unlike the tax rebate (available on incomes up to Rs 5 lakh and Rs 7 lakh, under the old and new tax regimes, respectively), a hike in the basic exemption limit will reduce the tax liability across slabs, that is, for all taxpayers.

“The basic exemption limit under the old and new regimes can be raised further by another Rs 50,000 to account for inflation. While the government announced a host of changes in Budget 2023, I expect them to sweeten the deal for individual taxpayers ahead of elections, even though it is an interim budget,” said Mumbai-based chartered accountant Chirag Chauhan.

Also read: Should the basic tax exemption limit be raised in Budget 2024?

More deductions on medical expenses

With rising medical costs, taxpayers are hoping for a hike in deductions for health insurance premium payments and medical expenses that are more in line with ground realities.

Currently, taxpayers can claim deductions of up to Rs 25,000 per year each for health insurance premiums paid for self and family and for parents under Section 80D. The deduction limit is Rs 50,000 in case of senior citizens.

Furthermore, to cover situations where senior citizens do not have health insurance, Section 80D provides for deduction of medical expenses incurred of up to Rs 50,000 a year. Children who pay for their parents’ medical expenses can also claim the benefit. The deduction limit should be hiked, experts said.

Additionally, experts said the Section 80D deduction should be made available under the new tax regime, given that healthcare expenses are unavoidable.

Apart from this, Sections 80DD and 80DDB, respectively, provide for deductions related to medical expenses on a disabled dependent and expenses incurred on treatment of specified diseases or ailments for oneself or a dependent family member.

Sudhir Kaushik, co-founder of Taxspanner.com, a tax firm, said, “The Rs 40,000 deduction limit (for those below 60 years of age) under Section 80DDB was set many years ago and with medical inflation having spiked, the government could look into raising this limit.”

Also read: Budget 2024: Tax deductions for medical purposes should be liberalised, say experts

Parity for self-employed professionals with salaried taxpayers

After Budget 2020 introduced the new tax regime, taxpayers could opt for lower tax rates with fewer deductions instead of the old tax regime. While salaried individuals can choose between the two tax regimes every financial year, self-employed individuals and businesses can enter the new tax regime and switch back to the old only once in their lifetime.

“Self-employed individuals should also be given the option to choose between the old and the new tax regime every year,” said Chetan Chandak, director of TaxBirbal, a tax firm.

This would be useful for freelancers whose incomes can vary greatly from year to year, making it difficult for them to pick one tax regime once and for all.

Higher employers’ NPS contribution limit

The Pension Fund Regulatory and Development Authority wants the tax-free cap on employers’ contribution to the National Pension System to be increased to 12 percent of basic salary and dearness allowance, if any, from 10 percent for private sector employees.

For government employees, the limit is already higher at 14 percent. Employees can avail of this deduction on the employers’ contribution, and employers can claim this as a business expense.

Relaxed taxation rules on debt mutual funds

In Budget 2023, the indexation benefit was taken away from debt mutual funds. The capital gains made on fresh investments (from April 1, 2023), would be added to the investor’s taxable income and taxed at the applicable slab rate, regardless of tenure – one year, two years or six months.

On the other hand, short-term capital gains (holding period less than 12 months) in equity funds are taxed at 15 percent, while long-term capital gains are taxed at 10 percent. Mutual fund experts said this adverse taxation on debt funds has dented their appeal and parity should be restored in terms of taxation.

Tax-free status for annuity income, separate deduction for life insurance

Life insurance companies suffered a setback when Budget 2023 withdrew the tax-free status for maturity proceeds of traditional endowment policies with an aggregate annual premium of over Rs 5 lakh. This year, insurers are hoping the budget will not have any such surprises in store.

They have demanded a separate tax deduction bucket for life insurance premiums as the Section 80C basket is overcrowded with other tax-saver avenues. Tax-free status for annuity income is another longstanding demand.

Home loan tax breaks under new regime

The wish list of real estate stakeholders includes a higher deduction limit on home loan interest payments, which is available under the old tax regime. This has remained unchanged at Rs 2 lakh since 2014. Officials said an increase is warranted because the rise in property prices over the years has led to higher loan amounts.

In addition, this benefit is not available in the new tax regime. “More than the Section 80C deductions of up to Rs 1.5 lakh, the home loan interest deduction of Rs 2 lakh is the key barrier to making the switch to the new regime,” said Bhavesh Shah, senior partner with Mumbai-based chartered accountancy firm Hasmukh Shah & Co