Budget 2024 Expectations: Personal tax

Divya Baweja, GES National Leader

Current environment

This will be the first full year budget for the new government. Going by past trends, the government is expected to continue making structural changes rather than providing tax breaks to taxpayers.

The government is likely to focus more on the new tax regime, quick processing of tax refunds, robust tax collection machinery, and speedy disposal of appeals and grievances.

Expectations

Top asks: Ease of tax compliances

Ask #1: Ease of tax payments/obligations for non-residents

Simplify the TDS compliance for home buyers where the seller is an NRI

According to the current provisions, home buyers need to deposit 1 percent of the purchase value as Tax Deducted at Source (TDS), where the property value is INR 50 lakh or more. Although the TDS deposit process is simple and convenient if the seller is a resident (i.e., with the challan-cum-statement in Form no. 26QB), the requirements are more complex if the seller is a Non-Resident Indian (NRI).

In cases where the seller is an NRI, a higher tax rate is deducted, and the buyer is also required to obtain a TAN, deposit the tax deducted and file e-TDS return. While the purchase and sale of the property is not a recurring transaction, obtaining TAN for the mentioned purpose alone may result in having more inactive TANs down the line.

To address the above-mentioned issue, the TDS process applicable to cases where the seller is an NRI may be eased by introducing these challan-cum-statements, which are applicable for a resident seller.

Enable tax payments from overseas bank accounts (removing the requirement of having a bank account in India)

At present, tax payments in India are accepted in modes such as net banking, debit cards, NEFT/RTGS and over-the-bank counters. The bandwidth has been broadened to include Indian banks, NEFT payments, RTGS payments and UPI payments. However, these are possible with an Indian bank only, which makes it difficult for a non-resident taxpayer to make tax payments.

Non-resident taxpayers who need to deposit tax would benefit if they are allowed to make tax payment from their overseas bank accounts.

E-verification using OTPs to foreign mobile numbers

With the introduction of e-filing of tax returns, efficiencies in time and effort have been brought in. The last-mile step of e-filing is the e-verification process that is restricted to having accounts with net banking/demat facilities with specified banks, Aadhaar OTP to India mobile numbers, digital signature certificates, etc. NRIs living outside India who need to complete the tax return filing process could benefit if the e-verification process can be extended through OTP to foreign mobile numbers or have two-factor authentication (different OTPs for foreign mobile numbers and email addresses). This would reduce paperwork and administrative tasks, such as tracking the receipt by the tax office and applying for condonation of delays. Furthermore, the 30-day time limit should be extended to facilitate verification through physical mode.

Tax refunds to overseas bank accounts

Non-resident individuals, especially foreign nationals, who leave India after closing their bank accounts in India could end up with a refund due to several reasons. At present, the tax refund is payable only to pre-validated India bank accounts. Any delay in processing the refund could cause bank accounts (even if open under the NRO status) to go dormant. This would prevent the refund from being credited to the account. To alleviate the difficulty, foreign bank accounts should be considered for tax refunds in case of PAN holders registered as non-residents/foreign nationals.

Policy recommendations and expected impact/outcome

Recommendation #1: Treaty relief at the time of tax withholding

Taxpayers are allowed tax credits/other benefits in terms of taxes paid outside India, subject to the fulfilment of certain conditions. As of now, taxpayers can claim foreign tax credit in their income tax return. Hence, these taxpayers end up with a huge refund, as there is no specific provision for the employer to consider the benefit at the time of tax withholding. To provide legitimate relief to taxpayers and avoid huge refunds and related cash flow issues, the government can issue guidelines for considering benefits under Section 90 during tax withholding and disclosing them appropriately in eTDS returns.

Recommendation #2: 401K benefit

To provide relief to residents who have income from foreign retirement benefits accounts, a new section has been inserted in the Income Tax Act to defer taxation of income from the foreign retirement fund in the year of receipt. Many countries (the US, the UK and Canada) tax the income from foreign retirement benefits accounts on a receipt basis. Moreover, to avoid difficulties in claiming the foreign tax credit due to a mismatch in the year of the taxation, the new section can be applied. However, the government may consider enabling this section to be applied retrospectively, i.e., it should apply to taxpayers who withdraw from the retiral benefit and their past contributions.

• Revised/belated return

1. The due date for filing the revised return or belated return is 31 December of the following financial year.
2. In a situation where the assessee is ROR in India claiming a foreign tax credit, it is difficult to finalise the FTC to be claimed in his India tax return when the return for the calendar year is not yet finalised in the overseas jurisdiction. For example, in the US, 2024 returns would be finalised only in April 2025. However, the revised/belated returns can be filed for FY 2023-24 only until 31 December 2024 to claim the credit for taxes paid for January–March 2024.
3. If there is no extension of the due date for belated/revised return filing, the FTC claimed on the return may not be final as it would be claimed on an estimated basis, or the taxes withheld at source in the overseas jurisdiction.
4. The due date for filing the revised belated/revised return should be extended at least until 31 March, instead of 31 December.

Recommendation #3: Bengaluru to be considered as metro city for the purpose of 10(13A)

• The Indian constitution recognises Bengaluru as a metro city among other cities, such as Delhi NCR, Mumbai, Kolkata, Pune, Hyderabad and Chennai.
• However, per the income tax provisions, only four cities in India (Delhi, Mumbai, Chennai and Kolkata) are considered metro cities and allowed to have 50 percent of the basic salary as the House Rent Allowance (HRA) and 40 percent of the basic salary for non-metro cities (other cities).
• Being one of the world’s fastest-growing cities, Bengaluru offers employment to many. There is an increase in the cost of living in the city compared with other cities. Hence, employees should get a 50 percent HRA deduction.

Recommendation #4

• Adjustment of Tax Collection at Source (TCS) collected under Section 206C on Liberalised Remittance Scheme (LRS) remittance for stock option plans against tax withholding under Section 192.
• In the union budget 2023, TCS for foreign remittances under LRS under Section 206C (1G) was increased from 5 percent to 20 percent.
• Accordingly, all overseas outward remittances, except for medical and educational purposes, that exceed INR7 lakh in a financial year will attract a 20 percent TCS.
• MNC employees in India have the option to participate in employee stock option plans and employee stock purchase plans of overseas parent companies. Acquisition of such shares by the employee is being treated as a payment under LRS that is subject to levy of TCS.
• Such taxpayers are already paying taxes on income arising from the exercise of stock options as perquisite income, and taxes are deducted by the employer under Section 192 of the Act.
• Levy of both TDS and TCS impacts cash flow for employees, as they will be able to claim a refund of TCS only after filing their income tax returns.
• Suitable amendments should be made in Section 192 to allow for adjustment of any TCS collected under Section 206C on such remittances made for employee stock plans.

Valuation rules for perquisite in the form of electric vehicles (Rule 3)

• Rule 3 of the income tax rules provides for the valuation of motor car benefits, where running and maintenance expenses are reimbursed by the employer. The valuation principles consider the cubic capacity of the engine for determining the perquisite value and typically cover only conventional fuel cars; no separate criteria have been laid out for electric vehicles.
• The stimulus provided by the government to EVs include tax deductions for interest on EV loans, lower GST and exemption/subsidised road tax/registration costs. With the availability of infrastructure facilities such as fast charging stations in public places such as metro stations, the usage of electric vehicles is on the rise.
• Given the encouragement to EVs, Rule 3 could be suitably amended to bring in the valuation mechanism for hybrid and electric vehicle maintenance (recharging batteries in lieu of fuel) and criteria based on battery capacity (besides the engine capacity).
• This valuation mechanism would help bring in much needed clarity and, in turn, could promote the use of electric vehicles even further and pave the way for a greener future.