Budget 2024: Tax Relief through Adjustments in Income Tax Slabs

By Mousami Nagarsenkar

The individual taxpayer expected some relief in tax rates and tax slabs in the interim Budget of February 2024. However, being a transitional budget till the new government took over after the General Elections, the government refrained from making any adjustments to the tax rates and tax slabs. With the elections done, a Union Budget, like other years, will be presented by the central government in the Parliament, and this time, expectations are rife around tax rates and tax slabs. The Union Budget is expected to be presented in the second half of July 2024. The expectations have increased manifold after the President’s address highlighting that this Budget will have a futuristic vision.

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While there is expectation that there will be some impetus or relief in the Budget proposals, for all sections of the society, the top most wish from individual taxpayers seems to be a rejig in the tax rates and tax slabs to ease the tax burden and bestow some relief to household budgets that have been reeling under inflationary pressures.

Currently, the tax slabs (without surcharge and cess) in the old regime and the simplified tax regime are as follows:

Post independence, India has historically seen very high tax rates. In 1997-98, the highest slab of 40% was reduced to 30%. Over the years the tax rates have reduced significantly. However, the highest slab is still 30%. If surcharge and cess are added, it results in an effective tax rate of 42.744% under the old tax regime and 39% under the new tax regime. As compared to countries like Singapore where the maximum tax rate is around 24%, the tax rates in India are still quite high. As a result, several high net-worth individuals have structured their residency and investments to be non-resident in India and mitigate their tax exposure. To make India more attractive for investments from all over the world and curb flight of capital from India, the government is expected to ease the tax incidence on individual taxpayers in this Budget.

How can taxes be eased?

• Increase in basic exemption limit - Increase in the basic exemption limit (i.e. threshold below which no tax is to be levied) in both the regimes which currently stand at INR 300,000 under simplified tax regime and INR 250,000 under old tax regime

• Reduction in the number of slabs and the slab rates – Last year the tax slabs under the new regime were reduced from 6 to 5, and reducing the tax on incomes in certain slabs. This resulted in a reduction in taxes of INR 37,500. A further reduction of the tax slabs to 3 or 4 slabs and reducing tax on lower slabs, could result in additional tax savings for households this financial year.

• Reduction is surcharge – The maximum surcharge for individuals even under the new tax regime is as high as 25% (37% for old tax regime) as against the surcharge applicable to a partnership firm or private company, of 12%. Last year the surcharge under the new tax regime for income over INR 5 crores was reduced from 37% to 25%. Hence, there is still room for the surcharge for individuals under the new tax regime to be further slashed

• Tax rebate - Currently, a tax rebate is available that reduces the income tax payable to NIL, even if income exceeds the basic exemption limit. However, in order to avail this, the individual should be an Indian resident, and his income should not exceed the thresholds specified (for income up to INR 700,000 for new tax regime and up to INR 500,000 for old tax regime). A hike in the rebate to further increase the no-tax threshold could be on the anvil.

Further, given the government’s push to make the new tax regime more attractive for masses, it is expected that most adjustments, are likely to be introduced in the simplified tax regime. Standard deduction was introduced in Budget 2023, in the simplified tax regime. However, the introduction of additional exemptions and deductions in the simplified tax regime, that are otherwise commonly claimed in the old tax regime (like medical insurance, etc) seems unlikely as it would lead to complexity and defeat the very purpose of putting in place a simplified tax regime.

While adjustments in the tax slabs results in lowering of the tax collections, the government has put in place a robust data collection and analytics mechanism to curb tax evasion in the form of Annual Information Return; AIR helps tax authorities to track the details of transactions worth INR 50,000 and above. Investigation of certain transactions by notices under section 133(6) of the Income-tax Act, 1961, email reminders to taxpayers for filing their original tax returns, revised and updated returns, are some of the other mechanisms. With a widening of the tax base as a result of such measures, individuals are hopeful of a moderation in the tax rates. This will also boost consumption across sectors.

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(The author is Partner, Deloitte Touche Tohmatsu India LLP. Views expressed are author’s personal and do not necessarily reflect the official position or policy of the Outlook Media group or its employees.)