Tax reliefs for lower income slab

Union Budget 2023– The last few years have been extremely challenging for individuals due to Covid scenario, global war related crisis, soaring inflation, pay cuts, layoffs, along with higher medical expenditure. To add to these, there is fear of a global recession already looming large on the minds of the common man. Hence, boosting demand would certainly be one of the major goals of the Indian government.

Given all of this, there is tremendous expectation that the Union Budget 2023 could provide for more net disposable income (specially for lower and middle income earners) by way of reduction in taxes or otherwise. This would be with the objective that such additional net disposable income will be utilized by individuals and households for meeting/ enhancing their consumption needs and thereby giving the required boost to the demand for goods and services across sectors.

While there are various options/ methods that may be considered for this purpose, there have been widespread speculation that the Government may look at enhancing the basic tax exemption limit in order to increase disposable incomes which could help in reviving consumption.

Currently, the basic exemption limit under both existing and new tax regime is INR 2.5 lakhs per annum. (Resident individuals having taxable income up to INR 5 lakhs are entitled to a tax rebate of INR 12,500 or equal to the amount of tax payable (whichever is lower)). The main reason for such expectation being that tax rates for individuals have not been changed since a very long time, apart from the introduction of new tax regime.

For individuals with income above INR 5 lakhs (assuming all other things remaining constant) this could translate in tax savings ranging from INR 13,000 to INR 17,810 per annum depending on the applicable surcharge rate basis level of income.

For individuals with income equal to or less than INR 5 lakhs per annum this may be tax neutral. It will eliminate the need to mandatorily file tax return. Hence, it will promote the government’s agenda of ease of compliance for small taxpayers.

During Budget 2020, the new optional tax regime (i.e. lower tax rates and different income slabs) was introduced, wherein an individual gets an option to choose between the existing tax rates and the new tax regime (without considering prescribed exemptions/ deductions).

In order to make the new tax regime more attractive, in addition to the proposed enhancement of the basic tax exemption limit (to INR 5 lakhs), the fnance ministry may consider tweaking the slab rates as well under the new optional tax regime.

Moreover, the subsequent income slabs and applicable rate of tax may be suitably adjusted, i.e., where the existing rate of tax is 5% for taxable income between INR 2.5 lakhs to INR 5 lakhs, such 5% tax rate post the recommended increase of basic exemption limit (to INR 5 lakhs) could be made applicable for taxable income between INR 5 lakhs to INR 7.5 lakhs.

Considering the same, the threshold limit for the highest tax rate could be increased from 15 lakhs to 17.5 lakhs consequently.

Hence, the tax slabs under the new tax regime would be as under:

Given the above, if the tax rate moves as proposed above, basis the income tax slab that a resident individual may fall into, the maximum total tax savings (including surcharge and education cess) may be as high as approximately INR 1 lakh per annum in the hands of eligible resident individual.

The above are certain suggestions to potentially leave the common man with some more money to spend on his needs. Needless to state that other factors like number of taxpayers not required to file a tax return, direct tax revenue foregone, tax-GDP ratio, managing fiscal deficit etc. also merit a detailed thought process.

(The author is partner and head – Global Mobility Services – Tax, KPMG India)

1 thought on “Tax reliefs for lower income slab”

  1. Heights of stupidity. The Tax slabs should be dynamic and linked to inflation. Even the lowest grade staff is a tax payer. The EWS, is also a tax payer. If a person claiming EWS category and is a tax payer, then how come he is a EWS. Fooling people.

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