Union Budget 2023 expectations on Personal Finance

What will be the budget effect on personal finances 2023. There are going to be a lot of expectations on union budget 2023 effect on personal finances as that is one area the government is likely to focus on for boosting consumption. This can either be done by tweaking the limits of tax free income or by enhancing the exemptions. That is where the budget impact on personal finances 2023 will be really relevant.

The impact of budget on personal finances would be of relevance in this year as it comes after 2 tough years of weak income flows and high inflation. There would be enough measures to help people handle inflation better. Let us look at in detail at the likely union budget impact on personal finances.

Easing the inflation impact on households

One of the most telling data was the sharp fall in the savings level in FY22 due to a spike in inflation. Not only did consumption expenditure go up for households and savings come down, but most households had to dip into their savings to meet regular expenditure. The sharp fall in the savings shows a negative savings rate of around 300 basis points in FY22. The fear is that FY23 also saw persistent high inflation levels. What can Budget 2023 do?

Firstly, the budget can make a start by cutting the GST rates on items of mass consumption so people get some relief on inflation costs. Secondly, it is time the government once again introduces the concept of inflation-indexed bonds that can beat inflation and earn a spread over it. Thirdly, the government peg exemption limits to inflation; just like dearness allowance is done and gradually work them higher once in three years or so. That may not have immediate benefit, but would give confidence for savings. Lastly, the budget can look at higher tax threshold and higher tax breaks, but we will look at these points in detail later.

Time to rationalize dual tax structure

The dual tax structure has not had many takers. In fact, as of end of 2022, the migration to the new system of taxation is less than 1%. The reasons are not far to seek. The new tax structure does away with all exemptions in exchange for a small reduction in tax rates. Also, there are just too many tax brackets in the new structure which makes it relatively complex. One way is to launch presumptive tax scheme where flat tax at 6% to 8% of income is levied on people up to a certain threshold. This will attract more people to the new tax structure.

Alternatively, the budget can look at allowing basic essential exemptions like standard deduction and medical insurance for the new system. One of these systems can work better. One more option would be to scrap the new tax scheme altogether and enhance the tax exemption limit to Rs5 lakhs. Currently, a person earning Rs5.50 lakhs of taxable income starts paying tax from Rs2.50 lakhs onwards. This can be avoided by enhancing the base tax-free income to Rs5 lakhs. In that case, the new system can be merged into the old system.

Enhance select exemptions to make them meaningful

We have already spoken about pegging exemptions like Section 80C, Section 80D and Section 24 to the inflation levels, so the reset is automatic. However, there has to be a base to start these from. Here is what is likely in the Union Budget.

1. The limit for Section 80C can be enhanced from the current Rs1.50 lakhs to Rs3 lakhs in the current year with additional exemption of Rs1 lakh for ELSS schemes of equity, passive and debt funds. The other option is to give a blanket exemption limit of Rs5 lakhs under Section 80C and then freeze it for 3 years. After that, the inflation indexed exemption reset can be applied.
    

2. The home loan exemption is another area that needs to be reset from the current Rs2 lakhs to make it relevant to the taxpayers amidst current realty prices. The limit can be enhanced to Rs5 lakhs as a consolidated limit for home loan interest, principal, affordable housing and first home exemption.
    

3. The current system of health insurance exemption of Rs25,000 for regular policies and Rs50,000 for senior citizens is too complicated. The government can look to offer an overall limit of Rs1.25 lakhs for medical insurance premium leave it to individuals how they want to structure it.

Enhance standard deduction and expand coverage

Standard deduction at Rs50,000 is too low considering it was introduced by cancelling the benefit of medical allowance and transport allowance. Hence the net effect can be quite low. Either, the Union Budget 2023-24 can look to reintroduce the benefits of medical allowance and transport allowance to offer relief to tax payers or it can just give a blanket rise to the standard deduction limit from Rs50,000 to Rs1 lakh. Standard deduction can also be extended to all individual tax payers, rather than just salaried and pensioners.

Make capital gains more palatable

Since scrapping STT is not likely to happen due to its revenue potential, Budget 2023-24 must look at other alternatives. One way is to scrap the tax on long term capital gains, or to charge 10% tax between 1 year and 3 year holdings and then make holdings above 3 years fully exempt from long term capital gains. This will enhance the stickiness. Short term capital gains can also be given the benefit of Rs1 lakh base exemption. Dividend tax must be scrapped and dividends above Rs1 million per year can be taxed at a nominal 10%.

Offer special concessions for Work from home

The Union Budget must consider that increasingly people are working from home adding to their costs like communications, bandwidth etc. in addition to standard deduction, the Budget can also look at an additional WFH rebate on tax, which can be to the tune of around Rs10,000. This will ensure that it is a relief on tax and not on income.

Hopefully, Budget 2023-24 will make boosting household disposable income its priority.