Interim Budget 2024: Find out the Banking Sector and Personal Tax Expectations

Interim Budget 2024: As India approaches the Union Budget in February, expectations run high, especially in the banking and personal tax sectors. This year, being an election year, the Budget is likely to be a vote on account, primarily focusing on essential government expenditures. However, it's crucial to analyze the potential impacts on the banking sector and personal tax rules.

Key points

• Budget likely to be a vote on account due to being an election year.

• Scheduled commercial banks show robust health with strong ratios.

• IBC remains dominant, accounting for 43% of total recovery in 2022-23.

• Major bank privatization unlikely in this budget, given the sector's stability.

• Calls for parity in National Pension Scheme deduction between government and private sector employees.

• Proposal to increase the standard deduction for salaried employees from Rs 50,000 to Rs 1,00,000.

• Suggestion to include Bengaluru, Hyderabad, and Pune as metro cities for HRA exemption.

• Call for simplification of TDS compliance for home buyers dealing with NRI sellers.

Banking Sector Expectations

As India eagerly anticipates the upcoming Union Budget in February, attention is drawn to the expectations within the banking sector. Given the election year dynamics, the budget is likely to focus on essential government expenditures. The banking system, as of September 2023, appears to be in good health, boasting robust ratios and low non-performing assets. While major bank privatization seems improbable in this budget, there's a keen interest in potential regulatory changes to ensure stability and foster growth in the financial sector.

Financial Health of Scheduled Commercial Banks

The banking sector is currently robust, with key indicators showcasing stability. As of September 2023, scheduled commercial banks reported a capital-to-risk-weighted assets ratio of 16.8% and a common equity tier 1 (CET1) ratio of 13.7%. Notably, the gross non-performing assets (GNPA) ratio and net non-performing assets (NNPA) ratio reached multi-year lows at 3.2% and 0.8%, respectively. This healthy state makes major bank privatization in the upcoming Budget seem unlikely.

Regulatory Environment and Challenges

Last year's Budget Speech emphasized a review of financial sector regulations, but the execution has seen variations. The RBI's recent instruction regarding Alternative Investment Funds (AIFs) lacked public consultation, creating uncertainty. To enhance stability, a proposal for an administrative procedures statute, akin to the US Administrative Procedures Act, could offer a lasting solution.

Stressed Assets and Insolvency

While the Insolvency and Bankruptcy Code (IBC) remains a dominant recovery method, there's room for improvement. The upcoming Budget could draw inspiration from the RBI Governor's recommendations, focusing on realigning dynamics between creditors and debtors, reaffirming the role of financial creditors, establishing a framework for group insolvencies, and making the regulatory regime on Special Situation Funds (SSFs) more attractive.

Future Reforms and Stability Signals

The Budget, being a vote on account, might not introduce major banking reforms. However, it presents an opportunity to signal future changes for stability in the financial regulatory regime and the development of the stressed assets market.

Personal Tax Expectations

Amidst the fiscal anticipation, individuals are keenly watching for potential changes in personal tax rules. With modifications introduced in Budget 2023, expectations are high for adjustments in the basic exemption limit and parity in National Pension Scheme deductions between government and private sector employees. Proposed increases in standard deduction and considerations for House Rent Allowance exemptions in emerging cities signal potential relief for taxpayers. The focus remains on simplifying Tax Deducted at Source (TDS) compliance for smoother transactions, especially involving Non-Resident Indian (NRI) sellers.

Basic Exemption Limit

Expectations surround a potential increase in the basic exemption limit by at least Rs 50,000 under both tax regimes. This adjustment would alleviate tax liability for all taxpayers, increasing their net take-home income.

Parity in NPS Deduction

Proposed changes include aligning the deduction allowed for National Pension Scheme (NPS) contributions between government and private sector employees. Equalizing the deduction at 14% of salary for both sectors would address the current disparity.

Standard Deduction Increase

To address rising living costs, an increase in the standard deduction for salaried employees from Rs 50,000 to Rs 1,00,000 is suggested.

Metro City Consideration for HRA Exemption

Bengaluru, Hyderabad, and Pune, as rapidly growing cities, should be considered as metro cities for House Rent Allowance (HRA) exemption, aligning them with Delhi, Mumbai, Chennai, and Kolkata.

Simplification of TDS Compliance for NRI Sellers

Proposals include simplifying Tax Deducted at Source (TDS) compliance for home buyers dealing with Non-Resident Indian (NRI) sellers. A streamlined process akin to resident sellers would enhance efficiency.

Conclusion

While the upcoming Budget may not bring forth revolutionary changes, it holds the potential to lay the groundwork for future reforms in both the banking sector and personal tax rules, ensuring stability, fairness, and economic growth. Stay tuned for the key announcements that will shape India's financial landscape in the coming year.

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