Budget 2024 income tax expectations: Imagine working for a job that pays you less money every year. Will you continue in such a job? The simple answer for most of us will be a resounding “No”. Welcome to inflation 101 – if you earn the same amount year after year, your real earnings have declined as you cannot buy the same basket of goods anymore.
The same concept applies to the Rs 15 lakh tax threshold, with India’s CPI ranging between the four-eight percent per annum over the past few years; the post-tax income of the common man is not substantial enough. All of us have borne the brunt of the unchanged limit. Enhancing the Rs 15 lakh threshold under the new tax regime to Rs 20 lakh could ease this burden.
The government launched an optional new tax regime under the Finance Act, 2020, enabling individuals and Hindu Undivided Families (HUF) to apply for lower tax rates by giving up certain deductions and exemptions, such as 80C, medical insurance, house rent allowance, and self-occupied property interest. Under this regime, tax rates are distributed per various slab rates starting from five percent and up to 30 percent in cases where annual taxable income exceeds Rs 15 lakh. The new tax regime is a logical choice for taxpayers who do not claim expenditures or investment benefits.
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Income tax rates and tax slabs under the Finance Act 2023 have been reduced to five from six to make the new tax regime more lucrative. The simplified regime allows a standard deduction of Rs 50,000 per annum. The new tax regime is considered the default tax regime (unless opted otherwise by the taxpayer). Individual taxpayers and HUFs can still opt for the old tax regime when filing annual income tax returns if claims of eligible deductions and exemptions result in a lesser tax outflow. Wider adoption of the new tax regime is a clear objective for the tax authorities. Increasing the ceiling limit periodically on the basis of inflation will signify a pragmatic and taxpayer-friendly approach and encourage adoption.
This concept of inflation adjustment already exists in the capital gains tax regime. Adjusting the acquisition cost of the asset based on the cost inflation index helps the asset seller offset the impact of inflation while computing capital gains. Carrying forward this concept to the new income tax regime is indeed logical. Recent changes in the income tax rates and the slabs helped to reduce tax outflow for all income levels. However, as income increases, these tax savings get diluted on account of a 30 percent tax cost. Thus, it is time to revisit the said threshold.
Enhancing the tax threshold periodically will help maintain the real-income levels of taxpayers, preventing an unintentional increase in their tax burden as inflation erodes the purchasing power of money over time.
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Further, consumer spending is a vital driver of economic activity. If the minimum income tax threshold does not keep pace with inflation, taxpayers may experience a decline in disposable income, leading to reduced spending.
Also, failure to adjust the minimum income tax threshold for inflation can cause economic disparities. Low and middle-income earners may be pushed into higher tax brackets, exacerbating inequality.
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To ensure that individuals are not burdened with an increased tax liability, the minimum income tax threshold must be adjusted for inflation. An inflation-adjusted minimum income tax threshold not only safeguards taxpayers from an undue increase in their tax burden but also contributes to a more equitable and dynamic economic environment.
(Deepika Mathur is Executive Director, Deloitte Haskins & Sells LLP. Abhay Chaturvedi, Senior Manager at Deloitte Haskins & Sells LLP contributed to the article.)