In the backdrop of inflation and high rates of tax, there is an urgent need for updating the tax slabs as well for enhancing the amount of deductions, says a BankBazaar Primer Budget ‘24.
The report argues that since the new tax regime has failed to attract salaried taxpayers, there is an urgent need for enhancement in deductions in the old regime that taxpayers continue to opt for.
The old tax regime offers a spate of tax deductions which include loan payments, insurance premia, tax saving investments such as provident fund, tuition fee and medical expenses.
These deductions are substantial and bring the tax liability down for many who opt for it over the new tax regime where deductions are very few.
The report also highlights that inflation has eroded income substantially. The report notes that every rupee earned is now effectively worth Re 0.55 in 2024-25 if adjusted for inflation.
This means ₹10 lakh earned in 2012-13 is now effectively ₹5.50 lakh and ₹20 lakh is ₹11 lakh. Put differently, if someone earned Re 1 in 2012-13, one would need to earn ₹1.81 to have the same purchasing power.
New tax regime
Although the new regime – on the face of it – appears inflation-friendly. Upon looking at it closely, one would realise that its positive impact is felt on incomes up to ₹15 lakh, it said. Up to this level, the effective tax rates seem lower than inflation-adjusted values from 2013-14.
However, above ₹15 lakh level, there is no inflation adjustment provided by the new regime.
Frozen tax slabs
The paper also says that as compared to 2012-13 benchmarks, the 20 percent and 30 percent slabs must be updated for the old regime. The highest tax rate of 30 percent should be levied on income above ₹18 lakh, and 20 percent on income above ₹9 lakh.
Taxpayers who fall in the high-income bracket prefer the old regime where tax slabs are frozen at 2013-14. The paper recommends changing of tax slab.
The ‘0’ percent tax slab currently applicable for income under ₹2.5 lakh has been unchanged since July 2014. The report suggests that it should be raised to ₹5 lakh. Besides, 5 percent to 10 percent tax should be levied on income between ₹5 lakh and ₹9 lakh.
20 percent tax should be levied on income between ₹9 and 18 lakh. And 30 percent tax should be levied on income above ₹18 lakh.
Enhancements required
The paper argues that there are enhancements required in deductions. The paper lists these four enhancements:
I. Deduction under 80C limit must be enhanced to a minimum of ₹2 lakh from ₹1.5 lakh which were set in 2014.
II. 80D deductions must be enhanced to ₹50,000 for general taxpayers and ₹one lakh for senior citizens in view of the rising costs of insurance premia post Pandemic.
III. Home loan interest and principal payments should be separately in its own section and should go up to ₹5 lakh.
IV. Rebates under 87A should be extended to incomes up to ₹6.3 lakh benchmarking to the last such update done in 2019.