The upcoming Budget should consider increasing the income tax exemption limit to Rs 5.7 lakh to align with inflation trends, streamline the Tax Deducted at Source (TDS) framework, and ensure equitable tax treatment between bank deposits and equities, according to a recent analysis by think tank GTRI.
Since 2014, the income tax exemption threshold for individuals has remained stagnant at Rs 2.5 lakh. When adjusted for an annual inflation rate of 5.7 percent, the 2014 threshold equates to approximately Rs 1.4 lakh in current times. To maintain its real value over the years, the income tax exemption limit should realistically be set at Rs 5.7 lakh, as asserted by GTRI.
In addition, the analysis highlights that the minimum wage for skilled workers in Delhi is Rs 21,917 monthly, or Rs 2.63 lakh annually. Thus, many lower-income professionals, including drivers and support staff, could benefit from exemption from tax return filings. Furthermore, GTRI recommends increasing fixed deductions and exemptions.
The current Rs 10,000 deduction for savings deposit interest, established in 2013, now holds a value equivalent to only Rs 5,000. By 2025, this should be elevated to Rs 19,450 to rightly reflect inflation adjustments.
Similarly, the deduction limit for life insurance premiums, provident fund contributions, or superannuation fund payments, which was last revised in 2015 at Rs 1.5 lakh, should be brought to Rs 2.6 lakh by 2025, as its inflation-adjusted worth is roughly Rs 83,000 today.
The Rs 25,000 deduction for medical insurance payments, last updated in 2016, has diminished to Rs 14,750 in current terms. For 2025, the adjusted limit should be set at Rs 41,000.
Currently, taxpayers may choose between the old I-T regime, which offers various deductions and exemptions, and a new regime that, although lower in tax rates, provides no exemptions.
In the new tax regime, incomes up to Rs 3 lakh are exempt from tax, while earnings ranging between Rs 3 and 7 lakh are taxed at 5 percent, with rates increasing to 10 percent for Rs 7-10 lakh, 15 percent for Rs 10-12 lakh, 20 percent for Rs 12-15 lakh, and 30 percent for incomes exceeding Rs 15 lakh.
Conversely, under the old tax regime, the exemption threshold is Rs 2.5 lakh, with a 5 percent tax on income from Rs 2.5 to 5 lakh, 20 percent for Rs 5 to 10 lakh, and a 30 percent rate for income exceeding Rs 10 lakh.
GTRI advocates for inflation-adjusted tax slabs and exemptions to guarantee that these benefits retain their real value, thus shielding taxpayers‘ purchasing power. Many countries have already implemented automatic inflation indexing regarding tax slabs, and India could benefit from following this approach.
In addition, GTRI highlights the need for simplification of the TDS structure. Originally introduced in 1961 with just four categories—salaries, interest on securities, dividends, and contractor payments—TDS now encompasses over 40 categories. Despite this expansion, a significant portion of TDS revenue is derived from a few sources, including salaries, dividends, contracts, professional fees, rent, and non-resident payments.
The current complexities surrounding TDS compliance, driven by various rates and thresholds, could be alleviated by potentially eliminating TDS on less significant categories. With advancements in digital systems and integrated government databases supporting compliance, reforms to the TDS regulations would streamline business operations and improve efficiency, without undermining revenue collection.
Moreover, GTRI pointed out the inequity in the treatment of bank deposits versus capital market gains. Long-term capital gains from equities held over a year are taxed at 12.5 percent, while interest from fixed deposits is taxed at individual slab rates, which can be as high as 30 percent.
This discrepancy may lead individuals to prefer equity investments over fixed deposits. To rectify this, GTRI proposes that the tax on fixed deposit interest for deposits held beyond 365 days be capped at 12.5 percent for individual taxpayers, with appropriate legislative conditions.
This measure would harmonize the tax landscape for bank deposits and stock market investments, thereby fostering greater savings in fixed deposits.
In light of rising inflation concerns, we recommend adjusting tax exemptions to reflect these changes, reclassifying futures and options as speculative activities, and creating parity in tax treatment for both bank deposits and equities. Such modifications would lead to a fairer taxation system, promote savings, and bolster economic development,” stated Ajay Srivastava, the Founder of GTRI.