In a move aimed at alleviating financial stress on the middle class and boosting consumption, India is considering reducing income tax for individuals earning up to ₹15 lakh annually in the upcoming February budget. This potential reform could significantly impact urban taxpayers struggling with high inflation and rising living costs.
Details of the Proposed Tax Cuts
The tax cut will likely apply to those opting for the 2020 tax system, which offers lower rates but does not allow exemptions for expenses like housing rentals and insurance.
- Current Tax Rates Under 2020 System:
- ₹3 lakh to ₹15 lakh: 5% to 20%
- Above ₹15 lakh: 30%
- Alternative Legacy System: This plan permits deductions for housing and insurance but involves higher rates.
The proposed changes could encourage more taxpayers to adopt the simplified 2020 tax regime, making compliance easier.
Economic Implications
- Middle-Class Relief: With inflation impacting disposable income, a tax cut could provide immediate financial relief to millions of taxpayers.
- Boost to Consumption: Additional disposable income could revitalize urban consumption, particularly for goods like vehicles, personal care products, and electronics.
- Economic Growth: With the economy growing at its slowest pace in seven quarters, stimulating demand could help sustain India’s position as the world’s fifth-largest economy.
Political and Fiscal Considerations
The government faces mounting political pressure from the middle class, whose wages have struggled to keep pace with inflation. While the exact revenue loss from the tax cuts remains undisclosed, experts believe the move will likely prioritize middle-class welfare over fiscal concerns.
Additionally, India’s income tax collections largely come from individuals earning over ₹1 crore annually, whose tax rate remains unchanged at 30%. The government expects the revised rates to offset revenue losses by broadening the adoption of the 2020 tax system.
Summary
India is considering reducing income tax for individuals earning up to ₹15 lakh annually in February’s budget to support the middle class and drive consumption. The change, applicable under the 2020 tax regime, aims to alleviate financial stress, boost urban demand, and revitalize economic growth amidst inflation and slower GDP expansion.
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