A pleasant surprise awaits personal income tax payers in interim budget 2024-25
The interim budget on 1 February is likely to increase the tax rebate under the new personal income tax regime, two people close to the discussions said, giving relief for the middle class ahead of the approaching general elections.
The plan is to raise the tax rebate, which is now available for income up to ₹7 lakh, to about ₹7.5 lakh under the new regime, the people said on the condition of anonymity.
Tax rebate eligibility is calculated on the net income after taking into account standard deduction of ₹50,000. Accordingly, a person with income of ₹7.5 lakh, after accounting for the standard deduction, will not have to pay any income tax from 2024-25 onwards, according to the proposal under discussion.
“This is aimed at giving tax benefit to the hard-working middle class. Of course, in the full-year budget to be presented later in the year (after the national elections), finer modifications could be made,” one of the two people said.
The interim budget to be presented by Union finance minister Nirmala Sitharaman is likely to have a Finance Bill proposing the change.
Emails sent to a finance ministry spokesperson on Friday seeking comments remained unanswered till press time.
In the last Union budget, the government raised the rebate available under the new personal income tax regime from ₹5 lakh to ₹7 lakh, while also raising the basic exemption limit to ₹3 lakh from ₹2.5 lakh earlier. The government then also allowed a deduction of ₹15,000 for family pension, reduced the surcharge for high income earners, and lowered the number of income slabs from seven to six to make this scheme more attractive.
The government’s estimate is that a significant part of personal income tax payers would be in the new regime in 2023-24, which is now the default tax filing option with the facility to opt out. The increase in rebate being discussed is expected to accelerate this shift, while giving a feel-good factor to the middle class in an election year.
Budget proposals could undergo several reviews before they are finally presented.
According to data released by the Central Board of Direct Taxes (CBDT) last year, individuals in the income range of ₹5.5 lakh to ₹9 lakh a year filed the highest number of tax returns among all income ranges in assessment year 2021-22, and accounted for a fourth of all returns filed as well as income reported in that year, indicating this segment’s importance in tax policy.
The government’s stated position has been to lower the tax burden in line with increasing tax receipts. In the April to November period of this fiscal, the Centre’s tax revenue (direct and indirect) grew by 14.7% against the budget estimate of 10.5% for direct taxes and 10.45% for indirect taxes, indicating a possible improvement in tax collections beyond the budgeted ₹23.3 trillion in 2023-24 after accounting for states’ share.
Experts said that while tax rebate increase will help the middle class, the government should also consider greater tax relief on social security payments. “An increase in the extent of tax rebate under the new personal income tax regime will obviously help tax payers. It is also true that social security is important and tax payers should be encouraged to invest in social security instruments. Deductions for contribution to life insurance and provident fund, etc., available under the old regime should be allowed in the new personal income tax regime as well,” one of the expert said. At present, benefits such as the ₹1.5 lakh deduction available to individuals under the old tax regime for investments in life insurance and provident fund, and the ₹50,000 deduction for health insurance premium paid are not available in the new regime.
“Parity on tax treatment of employer contributions to the National Pension Scheme (NPS) and to provident fund—by way of tax exemption for employers’ contribution to the NPS to the extent of 12% of salary as against 10% now allowed in the private sector—as reportedly suggested by the Pension Fund Regulatory Development Authority (PFRDA), along with higher rebate under the new personal income tax regime, would give taxpayers, especially the middle-class, relief,” another expert said.
New agency Press Trust of India reported on Friday quoting PFRDA chairperson that the pension regulator had recommended employer contribution to the NPS up to 12% of salary be exempt from tax, up from the presently allowed limit of 10%, bringing parity between private sector employers’ NPS contributions and provident fund contributions. In the case of government employees, government contribution to the NPS up to 14% of salary is exempt from income tax.