How does a country’s Budget affect the common man?

What is Union Budget?

The Union Budget essentially is a statement of income and expenditure of the Government of India. The Budget has two components, the revenue budget and capital budget. In the revenue budget, tax (direct and indirect) and non tax revenues (e.g. dividends paid by CPSEs) are the source of income for the Government. The expenses for day to day functioning of the Government (e.g. wages, salary etc) come under revenue expenditure. The capital budget refers to the non-revenue part of the budget. Capital receipts comprises of loans taken by the Government, disinvestment proceeds etc. Government spending on infrastructure, purchase of military equipment, health, education etc.comprise the capital expenditure of the Budget.

How Budget affects the common man?

Changes in direct (e.g. income tax) and indirect taxes (e.g. GST) have direct impact onhousehold disposable income and expenses. For example, if the Government reduces income tax rates then your disposable income will go up; you can save or spend more. If the Government increases Goods and Services Tax (GST) on certain products, then the cost of those products will go up and your expenses will rise. We will discuss the changes in Income Tax in the 2023 Budget later in this article.

While the change in direct and indirect taxes has a direct impact on companies and individuals, the capital budget has an indirect impact on us. The difference in the total expenditure and receipts of the Government is known as the fiscal deficit. The Government meets fiscal deficit through additional borrowing. Reducing fiscal deficit is the fiscal responsibility of the Government but the Government has to balance it with other priorities like reducing unemployment, increasing income and quality of life of people. For example, when the Government spends on infrastructure, employment is generated and incomes of families go up. When income increases, families and businesses spend more and this has a multiplier effect.

In FY 2023-24, the Government has increased its capex sending to Rs 10,000 crores. This will lead to employment generation and economic growth. However, fiscal deficit remains high for a long time then it leads to higher interest rates since the Government has to borrow more. Higher interest rates have a negative impact on private sector capex; companies will postpone capex since they will have to pay higher interest rates on loans to fund capex spending. High fiscal deficit also can cause inflation as we saw during the COVID-19 pandemic. In Union Budget 2023 the Government reduced its fiscal deficit target for FY 2023-24 to 5.9% of GDP.

We have discussed the broad picture so far. Let us now discuss how various announcements made in the Union Budget of 2023 will affect you.

Change in New Income Tax Regime– Relief for middle class

The part of the Finance Ministers’ Budget speech related to income tax is often the most eagerly awaited one, as far as individuals and families are concerned. In this year’s Budget, the Government had made several changes to the New Tax Regime. The Government has increased the basic exemption limit in new tax regime from Rs 2.5 lakh to Rs 3 lakhs. Standard deduction of Rs 50,000 will now be available to new tax regime also. The rebate available under Section 87A has been Rs 12,500 to Rs 25,000 for taxable income up to Rs 7 lakhs in the new tax regime. The table below shows the impact of changes in new tax regime for an individual / HUF with income of Rs 7 lakhs. You can see that, under the New Tax Regime, you do not have to pay any income tax for incomes up to Rs 7 lakh.

Reduction in surcharge – relief for HNIs

The Government has proposed to reduce the surcharge at income levels exceeding Rs 5 crore from 37% to 25% under the new tax regime. This will reduce the effective tax rate for individuals in the highest tax slab from 43% to 39%.

Suggested reading for you – plan your tax savings to get maximum benefits

Deductions under old tax regime will continue

Taxpayers who prefer to stay in the old tax regime will continue to avail all the deductions under the old tax regime. Some of the common deductions availed by taxpayers in old tax regime are Section 80C (PPF, ELSS, Life insurance etc) up to Rs 1.5 lakhs, Section 80 CCD (1B) (National Pension Scheme) up to Rs 50,000, Section 80D (Mediclaim) up to Rs 25,000 (for self / family) and Rs 50,000 (for senior citizen parents), Section 24 (home loan interest) up to Rs 2 lakhs, HRA, LTA etc. You should make a careful evaluation what deductions you can claim and decide whether the old or the new tax regime is beneficial for you.

You may also like to read why ELSS works not just for tax saving but also wealth creation

Increase in tax exempt leave encashment limit

Currently, employees can encash up to 10 months of their earned leaves at the time of retirement. For non Government employees leave encashment of up to Rs 3 lakhs at the time of retirement is tax exempt. From FY 2023-24, the Government has increased the tax exempt limit of leave encashment to Rs 25 lakhs. This is welcome news for taxpayers who are approaching their retirement.

In addition to the tax reliefs, the Government has announced a number of changes that will benefit large sections of our population.

Increase in limit for Senior Citizens Savings Scheme (SCSS)

Many senior citizens depend on the interest paid by SCSS for their regular income. The interest rate of SCSS is usually higher than FD interest rates for Senior Citizens in commercial banks. The Government has increased the investment limit in SCSS from Rs 15 lakhs to Rs 30 lakhs.

Increase in limit for Post Office Monthly Income Scheme (POMIS)

The Post Office Monthly Income Scheme is another popular scheme among senior citizens and other investors looking for regular income. The Government had increased the investment limit in POMIS from Rs 4.5 lakhs to Rs 9 lakhs for single account holders and from Rs 9 lakhs to Rs 15 lakhs for joint account holders.

New Government small savings scheme for women – Mahila Samman Savings Certificates (MSSC)

The Government has introduced a new small savings scheme for women, Mahila Samman Savings Certificates. This scheme has tenure of 2 years and has a fixed interest rate of 7.5%. The maximum investment limit under Mahila Samman Savings Certificates is Rs 2 lakhs.

Conclusion

People usually have lot of expectations from Budget but the Government has lots of constraints and has to balance complex priorities. In this article, we have tried to simplify the Budget for you and how it impacts you and your family. Budget 2023 has a number of announcements which can benefit a large number of tax payers e.g. tax exemption income up to Rs 7 lakhs, lower surcharge for HNIs, increase in tax exempt leave encashment for people who are retiring etc. The Government has also announced changes in small savings schemes which will benefit senior citizens and women.

You should see whether you can benefit from the changes in this year’s Budget. You should consult with your tax advisor if required.