JOIN USGood news for taxpayers? Modi government mulls lowering income tax rates in Budget
Finance Minister Nirmala Sitharaman is expected to announce some significant changes in tax slabs and lower rates, especially in the ‘new tax regime’ which was introduced in 2020, in order to provide relief to the middle-class, ahead of several assembly elections this year and crucially important 2024 general elections.
The income tax rates for individuals have not changed since the financial year 2017-18. The only change that has happened in the last five years is the introduction of the ‘new tax regime’ by Finance Minister Sitharaman in the union budget for 2020-21 presented on February 1 2020. In fact, the basic exemption limit has not changed for the past 10 years.
Quoting government sources news agency Reuters reported on Tuesday that the government is considering lowering rates under the voluntary new tax framework and may also introduce revised slabs in the upcoming budget.
Industry leaders and economists are also pitching for providing tax relief to the middle class in order to boost demands in the economy.
Over 60 per cent of business leaders anticipate an increase in tax exemption and deduction limits in the upcoming budget, according to a pre-budget survey conducted by Deloitte earlier this month. Around 70 per cent of the industry leaders who participated in the survey think that modifying personal taxation would support individuals.
In its pre-budget recommendations, industry body Assocham has suggested that the basic exemption limit for income tax should be increased to Rs 5 lakh from the existing Rs 2.5 lakh so that more disposable income is left in the hands of consumers and the economy gets a consumption boost and further leg-up in the recovery.
According to Assocham President Sumant Sinha, the buoyancy in both the direct and indirect tax collections should give enough elbow room to the government for raising the income tax exemption limit.
The new tax regime, which was introduced in 2020, has six slabs – 5 per cent, 10 per cent, 15 per cent, 20 per cent, 25 per cent and 30 per cent. While in the old income tax system for individuals, there are only three slabs – 5 per cent, 20 per cent and 30 per cent. The basic exemption limit in both the tax regime is 2.5 lakh. In the old tax regime, the highest tax rate of 30 per cent is applicable on income above Rs 10 lakh while in the new tax regime, it is applicable on income above Rs 15 lakh.
Under the new tax regime, multiple exemptions and deductions are not applicable. If say a salaried person opts for the new tax regime, he/she cannot avail of the benefits of standard deductions like house rent allowance (HRA), leave travel assistance (LTA) or the deductions available under Section 80C (home loan repayments, investments in PPF, EPF, NSC, insurance premium, school fee, etc), 80D (health insurance premium), 80CCD and other sections of the Income Tax Act.
Taxpayers are free to opt for the new tax regime or continue with the old regime. Individuals who pay EMIs for home loans and make investments in tax-saving schemes like PPF, NSC, health insurance, etc, have generally stuck to the old tax regime because of the various exemptions and deductions.
According to the sources, the Finance Minister would reduce rates and make changes in the new tax regime slabs in order to make it more attractive for the taxpayers.
Sitharaman introduced the new tax regime while presenting her second union budget in 2020. She is slated to present her fifth union budget on 1st Feb. This will be the last full budget of the second term of Prime Minister Narendra Modi's government. Given the slew of assembly elections this year and the general election in April-May 2024, Sitharaman is expected to announce several populist measures including tax relief to woo voters.