If whispers are to be believed, the coming Budget will be Finance Minister Arun Jaitley’s most populist one yet. He is widely expected to hike the personal income tax exemption limit-and some are optimistically predicting that the ceiling will be pushed up to Rs 5 lakh-so India waits with bated breath. But even if he only hikes the exemption limit from the existing Rs 2.5 lakh per annum to Rs 3 lakh, the middle income group, especially the salaried class, will get substantial relief at a time when retail inflation has started inching up.
In fact, according to the latest SBI Ecowrap report, the move will benefit around 75 lakh people. “Due to 7th Pay Commission, the personal disposable income has increased, so we believe there is a need to raise the exemption limit to Rs 3 lakh. Due to such increase in limit, around 75 lakh tax payers will be exempted from income tax,” said the report titled ‘Union Budget: If wishes were horses!’
Let’s look at the math. Though the current exemption limit is Rs 2.5 lakh, thanks to the tax rebate under section 87A, those with total income of Rs 3 lakh do not have to pay any tax. And, if the exemption limit is pushed up to Rs 3 lakh, those earning above Rs 3.5 lakh stand to save Rs 2,500 in taxes according to Cleartax, India’s largest consumer Income Tax e-filing website.
But what India really needs is a revision in tax slabs, with a new bracket being introduced for incomes between Rs 10 lakh and, say, Rs 20 lakh. Back in 2015, former finance minister P. Chidambaram had hit the nail of it head when he said, “I introduced three tax slabs in 1997, in what was called the dream budget. I feel there is a need for a fourth slab, since the liberalisation is giving huge rise in income for certain people.”
Other finance ministers who changed tax slabs, apart from Chidambaram, are VP Singh, who halved the number of tax slabs to four in Budget 1986, followed by Manmohan Singh (Budget 1992, when tax slabs were further reduced to 3). In this millennium, only Pranab Mukherjee has followed suit. He introduced the Rs 5 lakh to Rs 8 lakh bracket in Budget 2010, and pushed the ceiling up to Rs 10 lakh two years later.
If this new slab (Rs 10-20 lakh) is introduced at a tax rate of, say, 20%-and the Rs 5-10 lakh bracket is taxed at 10% instead of the current 20%-then “those with income up to Rs 10 lakh will half their tax outgo on income in excess of Rs 5 lakh and people earning up to Rs 20 lakh will save Rs 50,000 plus one-third of tax outgo on income in excess of Rs 10 lakh,” says Archit Gupta, Founder and CEO of ClearTax.
However, this could be a pipe dream for Budget 2018. “Given the pressures on revenue collections, a major reshuffling of tax slabs may be difficult. The finance minister will have a tough time balancing expectations and creating room for tax relief,” explains Gupta. One thing is for sure: If Jaitley does manage to pull it off then India would have finally got a taste of Modi’s much-promised ‘acche din’.