Like every year, the common man looks up to the Union Budget exercise with a lot of hope and expectations – specially about reducing the tax bill and consequently enhancing the net disposable income.
One such expectation doing the rounds this time is about enhancing the annual basic exemption limit to INR 5 lakh per annum from the existing INR 2.5 lakh per annum. Currently, the basic exemption limit (for individual taxpayers below 60 years of age) under both the new and old tax regime is the same i.e., INR 2.5 lakh per annum – which has remained the same since FY 2014-15. However, there is no tax payable if the income of the resident individual is equal to or below INR 5 lakh per annum (under both the regimes) on account of rebate under Section 87A of the Income Tax Act, 1961 (the Act).
Considering the inflation rate impacting the cost of living and the effect of recent pandemic, individuals are certainly experiencing an impact on their cash flows. Hence, any move to leave more disposable income in the hands of individual taxpayers will also boost consumption, which may also act as a catalyst for speeding up economic recovery and promote investments. Accordingly, the annual basic exemption limit for senior citizens and super senior citizens may be enhanced to INR 5.5 lakh per annum and INR 7.5 lakh per annum from INR 3 lakh per annum and INR 5 lakh per annum, respectively.
While this will be neutral from a cash flow perspective for individuals with income below INR 5 lakh per annum (mainly due to the Section 87A tax rebate referred above), however, the individuals falling in this category may be relieved from the mandatory tax return filing requirement.
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This move could benefit taxpayers (below 60 years of age) who have opted for the old tax regime with tax savings ranging from approximately INR 13,000 to INR 17,810 per annum depending on the applicable surcharge and education cess, assuming the other tax slabs and tax rates remain the same.
Further, the government may, in order to make the new tax regime more attractive, increase the annual basic exemption limit even under the new tax regime to INR 5 lakh per annum from the existing INR 2.5 lakhs per annum. The tax savings under the new regime would also range from INR 13,000 to INR 17,810 per annum depending on the applicable surcharge and education cess, assuming the other tax slabs and tax rates remain the same.
From a government’s perspective, the enhancement of basic exemption limit under both the old and new tax regime warrants a detailed evaluation of its impact as this would need to be balanced and assessed basis the potential quantum of taxpayers who will therefore not be required to mandatorily file an income tax return as well as on the overall direct tax collection foregone due to this proposed change.
(By Parizad Sirwalla, Partner and Head, Global Mobility Services – Tax, KPMG in India)