Context:
Income Tax Cuts is expected in the Upcoming Budget A Consumption Spurring Policy.
Why Income Tax Cuts?
- Slowdown in Consumption
- There is a deceleration of consumption in India’s economy due to stagnating real wages and inflationary pressures.
- There is therefore an excellent case for income tax cuts in the upcoming budget to boost disposable income and to stimulate demand.
Current Tax Exemption Limit and Inflation Adjustment
- Tax Exemption History
- The tax exemption limit for income was 25 lakh five years ago which when adjusted for inflation would need to be 31 lakh for 202425 to maintain the same purchasing power.
- The exemption limit is currently 3 lakh for those earning above 7 lakh This increase does not fully account for inflation which effectively raises the tax burden for many taxpayers.
Impact on Different Income Groups
- Low and Middle Income Groups
- The tax relief in the earlier budget July 2024 did not provide much of a benefit for the low income group. With inflation adjustment the relief benefits them very little by way of the increase in purchasing power.
- For the category of 7 lakh to 15 lakh the situation is a little better but it still fails to factor into account the aspect of inflation.
- High Income Groups
- Individuals earning above 15 lakh continue to pay the top tax rate of 30 which has remained unchanged since 2020-21.
- To maintain the same purchasing power individuals would need to earn 186 lakh in 202425 but they are still taxed at the same rate as in previous years.
Impact of Wage Growth Slowdown
- Real Wage Growth
- The wage growth which was already significantly lower in the recent quarters now has been severely cut off to the levels prevailing pre pandemic.
- Coupled with this is a higher inflation level and not getting enough tax relief urban Indians have had the purchasing power clipped even more.
Source: Mint
