As the deadline for filing income tax returns approaches, many companies have started distributing Form 16 to their employees. Typically, the last date for filing income tax returns is July 31st. If you are a taxpayer, you have likely begun preparing to file your ITR. However, there is news that the government may announce tax relief for the middle class. In today’s episode of Kharcha Pani, we will discuss this in detail, exploring the possible tax reliefs the Modi government might offer in the budget and who might benefit from these changes. We will also look at the current tax rates and the significant announcements that could be made for the common taxpayers in the budget.
Current Tax Scenario and Potential Announcements
Presently, taxpayers can file their income tax returns in two ways. In April 2020, a new option was introduced where the tax-free income threshold was increased from ₹5 lakh to ₹7.5 lakh. However, this came at the cost of losing several tax deductions. If you opt for the old tax regime, you can still benefit from various tax deductions under sections like 80C, where you can claim deductions up to ₹1.5 lakh. Additionally, under the old regime, after the rebate under section 87A, incomes up to ₹5 lakh are tax-free, whereas in the new regime, incomes up to ₹7.5 lakh are tax-free.
According to a Reuters report, the central government is considering reducing personal income tax rates for certain categories of taxpayers. Media reports suggest that the Narendra Modi government might present its first full budget of its third term in the third week of July, during which it could announce relief in income tax rates.
Why the Government Needs to Take This Step
Several factors necessitate this move. Post-election surveys indicate that voters are highly concerned about inflation, unemployment, and declining incomes. While the Indian economy is growing rapidly, the consumption rate remains sluggish. The Indian economy grew at a rate of 8.2% in the fiscal year 2023-24, which is higher than any other country’s GDP growth rate. However, consumption grew at a mere 4% rate. Prime Minister Modi, upon forming his government, claimed that the new government’s entire focus would be on increasing middle-class savings and improving their standard of living. According to Reuters, sources indicate that a reduction in personal income tax rates would increase savings for the middle class, which, when spent, could boost the economy’s consumption rate.
Potential Beneficiaries of Tax Relief
Reuters reports that taxpayers with an annual income exceeding ₹15 lakhs might receive some tax relief. However, the exact limit of this relief is yet to be determined. Additionally, the report suggests that there might be changes to the new income tax regime introduced in 2020 to provide more relief to the middle class. Currently, those earning above ₹10 lakhs annually under the old tax regime are taxed at a high rate of 30%. The government is considering reducing the tax rates for those with annual incomes up to ₹20 lakhs.
Expert Opinions and Public Expectations
To gain a better understanding of this matter, we spoke with tax expert Vinod Rawal. According to him, the current tax rates range from 5% to 30%, with two available regimes: the old regime and the new regime. In the new regime, there is a basic exemption of ₹2.5 lakhs, while in the old regime, it is ₹3 lakhs. Rumors suggest that the government is planning to cut taxes for those with incomes above ₹15 lakhs, reducing the highest tax rate from 30%. This move would create surplus money within society, encouraging savings and expenditure, which would benefit the economy.
Rawal also highlighted that the gap between the 5% and 30% tax rates is steep. When annual income increases from ₹2.5 lakhs to ₹15 lakhs, the tax rate increases sixfold, which is quite high. He believes that there might be some relief coming for the lower tax slabs as well.
Business Community’s Perspective
As the budget approaches, the business community is also presenting its demands. The Confederation of Indian Industry (CII) has suggested that the government consider providing income tax relief to those in the lowest tax slab. They also propose changes to the capital gains tax rules, which currently impose different tax rates on different assets. The business community faces challenges due to various tax rates and TDS regulations.
Finance Minister Nirmala Sitharaman is expected to meet with representatives from various industry organizations on June 20th to discuss these issues. This meeting is aimed at shaping the economic agenda for the Modi government’s third term, focusing on controlling inflation and accelerating economic growth.
Government’s Economic Agenda
The NDA government’s economic agenda includes making India a $5 trillion economy in the next few years and transforming it into a developed nation by 2047. The government has outlined policy measures to be implemented within the first 100 days of taking office, which include allowing special economic zones to sell in the domestic market and launching a comprehensive trade information platform.
Conclusion
As the budget announcement draws near, there is growing anticipation among taxpayers and the business community regarding potential tax reliefs and reforms. The Modi government’s focus on boosting middle-class savings and improving their standard of living through tax cuts could significantly impact the economy by increasing consumption. While exact details and limits of the proposed tax reliefs are yet to be finalized, the overall expectation is that any reduction in tax rates will create a positive ripple effect across the economy, encouraging spending and boosting growth.
Stay tuned for more updates and detailed analysis in our upcoming Blog and News. If you found this information helpful, do share your feedback with us. Until the next update, take care and stay informed.
FAQ on Modi Government’s Potential Income Tax Cuts for Income Above ₹15 Lakhs
1. What is the current Income Tax structure in India?
The current Income Tax structure in India is divided into different slabs based on the annual income of an individual. For income up to ₹2.5 lakhs, there is no tax. Income between ₹2.5 lakhs and ₹5 lakhs is taxed at 5%, between ₹5 lakhs and ₹10 lakhs at 20%, and income above ₹10 lakhs is taxed at 30%. There are also different tax regimes: the old tax regime, which allows for deductions and exemptions, and the new tax regime introduced in 2020, which offers lower tax rates but fewer deductions.
2. Is the Modi government planning to reduce Income Tax rates for individuals earning more than ₹15 lakhs?
Yes, according to media reports, the Modi government is considering reducing Income Tax rates for individuals with an annual income above ₹15 lakhs in the upcoming budget. This move is aimed at providing relief to the middle class, increasing savings, and boosting economic consumption.
3. What are the reasons behind this potential tax cut?
The potential tax cut is driven by several factors. The government aims to address voter concerns about inflation, unemployment, and declining incomes. Although India’s GDP is growing rapidly, consumption growth remains sluggish. By reducing Income Tax rates, the government hopes to increase disposable income, leading to higher spending and, consequently, a boost in economic growth.
4. How will this tax cut benefit individuals earning more than ₹15 lakhs annually?
If implemented, the tax cut will reduce the overall tax liability for individuals earning more than ₹15 lakhs annually. This will leave them with more disposable income, which can be saved or spent according to their preferences. Increased disposable income can improve the quality of life for these individuals and stimulate economic activity.
5. Will the new tax regime introduced in 2020 also be affected by these changes?
Yes, there are reports that the government might make adjustments to the new tax regime introduced in 2020. This regime, which currently offers lower tax rates but fewer deductions, could see changes that make it more favorable to taxpayers, especially those in higher income brackets.
6. What challenges do taxpayers currently face under the existing tax structure?
Under the current tax structure, taxpayers face a steep increase in tax rates as their income rises. For example, when an individual’s income increases from ₹2.5 lakhs to ₹15 lakhs, the tax rate jumps from 5% to 30%, which is a significant burden. Additionally, the complexity of choosing between the old and new tax regimes, each with its own benefits and drawbacks, adds to the confusion.
7. Will this tax cut affect the government’s revenue and fiscal deficit?
While a tax cut could reduce the government’s revenue in the short term, the hope is that increased economic activity and consumption will offset this reduction. The government has set a fiscal deficit target of 5.1% of GDP for the fiscal year ending in March 2025, and any tax cuts would need to be balanced against this goal. The long-term impact on the fiscal deficit will depend on how effectively the tax cuts stimulate economic growth.
8. How will the tax cut influence India’s middle class and their savings?
A reduction in Income Tax rates is likely to increase the savings of middle-class individuals. With more disposable income, they can invest in various savings instruments, purchase goods and services, or pay off debts. Increased savings and spending can lead to a more vibrant economy, benefiting not just the middle class but the entire country.
9. When is the government expected to announce these changes?
The government is expected to announce any changes to the Income Tax structure in the upcoming full budget, which is likely to be presented in the third week of July. This budget will be the first full budget of the Modi government’s third term, and it is anticipated to include several measures aimed at providing economic relief and stimulating growth.
10. What should taxpayers do to prepare for these potential changes?
Taxpayers should stay informed about any announcements regarding the upcoming budget and potential tax changes. It may be beneficial to consult with a tax professional to understand how these changes could affect their individual tax liability. Additionally, taxpayers should consider their options under both the old and new tax regimes to determine which would be more advantageous in light of any new reforms.
