Govt may hike exemption limit under new tax regime to Rs 5 lakh; relief unlikely for the rest

Govt may hike exemption limit under new tax regime to Rs 5 lakh; relief unlikely for the rest

The government is looking to give the country's impressive GDP growth a consumption boost to address weaker levels of spending by the middle class. One of the ways being considered is lowering certain personal income tax rates, according to multiple government officials.

The Centre is looking to increase the income limit for individuals before any tax is levied to Rs 5 lakh from Rs 3 lakh currently in the upcoming budget likely to be presented mid-July, one of the officials said. This will be applicable only to those filing returns under the new tax regime and is aimed at leaving more disposable income in the hands of individuals, particularly those in the lower earning bracket.

To be sure, a final call on this will be taken closer to the presentation of the budget.

Budget 2020 allowed individuals to choose between the existing structure with built-in provisions for a lower tax incidence via specified investments or go in for a new system offering blanket lower tax rates while forgoing most deductions and exemptions.

Under the old tax regime, a taxpayer can avail deductions against investments under certain sections as well as exemptions like house rent allowance and leave travel allowance, among others.

A second official said that the Centre is unlikely to entertain a request from industry representatives to reduce the highest individual income tax slab rate under the new tax regime from 30 percent to 25 percent.

"Changes in higher income tax slabs are unlikely because consumption boost is currently needed for lower-income people," the official added.

The government may not tinker with rates under the old tax regime either despite requests to increase the amount that attracts the highest income tax of 30 percent to Rs 20 lakh from Rs 10 lakh now. This is to ensure that more people are incentivised to move towards the new regime that discourages exemptions and rebates.

Those who earn more than Rs 15 lakh a year fall under the highest 30-percent tax bracket in the new tax regime, while under the older regime the highest slab kicks in for earnings above Rs 10 lakh itself.

The Centre is giving priority to potentially lower personal income tax rates rather than sharply increasing spending on subsidies and other schemes that are prone to wastage, a third official said.

"Tax rate cuts are a better way to boost consumption in the economy rather than splurging on welfare schemes given that such programmes are impacted by leakages to an extent, thereby leading to a situation where the benefit of the scheme sometimes fails to entirely reach those who need it the most," this official added.

The topic of measures to aid consumption has come up since the country is reeling with lower levels of private consumption growth of around 4 percent, a 20-year low outside the pandemic year. This despite a world-beating GDP growth rate of 8.2 percent in FY24.