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Government Plans Income Tax Cuts to Increase Middle-Class Disposable Income

In an effort to stimulate consumer spending and enhance the country’s impressive GDP growth, the government is contemplating reducing certain personal income tax rates, according to several government officials.

Proposed Tax Changes

One proposal under consideration is to raise the income threshold for individuals before taxes are applied, from the current Rs 3 lakh to Rs 5 lakh, in the upcoming budget expected to be presented in mid-July. This adjustment would apply exclusively to those filing under the new tax regime and aims to increase disposable income, particularly for lower earners.

Final Decision Pending

A definitive decision on this proposal will be made closer to the budget presentation date.

Current Tax Regime Options

Since Budget 2020, taxpayers have had the option to choose between the existing tax structure, which includes deductions and exemptions, or a new system that offers lower tax rates but eliminates most deductions and exemptions.

Under the old tax regime, taxpayers can claim deductions for certain investments and exemptions such as house rent allowance and leave travel allowance.

High-Income Tax Rates

A second official mentioned that the government is unlikely to reduce the highest individual income tax rate under the new tax regime from 30 percent to 25 percent, despite requests from industry representatives. “Changes in higher income tax slabs are unlikely because a consumption boost is currently needed for lower-income people,” the official explained.

There are also no plans to adjust the rates under the old tax regime, despite requests to increase the threshold for the highest tax rate of 30 percent from Rs 10 lakh to Rs 20 lakh. This is intended to encourage more taxpayers to adopt the new regime, which discourages exemptions and rebates.

Currently, individuals earning more than Rs 15 lakh per year fall under the highest 30 percent tax bracket in the new tax regime, while the old regime imposes this rate on earnings above Rs 10 lakh.

Focus on Tax Rate Cuts

A third official emphasized that the government prioritizes potential tax rate cuts over significantly increasing spending on subsidies and other schemes, which are often susceptible to wastage. “Tax rate cuts are a more effective way to boost consumption in the economy rather than expanding welfare schemes, which can be impacted by leakages, resulting in benefits not fully reaching those in need,” the official stated.

Economic Context

The discussion on measures to boost consumption arises amid concerns over sluggish private consumption growth, which is around 4 percent—a 20-year low outside the pandemic period—despite a robust GDP growth rate of 8.2 percent in FY24.

Source: Moneycontrol

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