Taxation remains one of the hottest topics every time before the budget announcement as this is the most important topic that impacts a large number of taxpayers who timely pay their taxes to the government. This time is no different. To highlight how the tax slabs should be arranged based on inflation and what has happened in the past, Bankbazaar.com has come up with a study suggesting new tax slabs to rationalise the taxes in the country.
According to the report, compared to 2012-13 benchmarks, the 20% and 30% slabs must be updated for the old regime. It continues to highlight that basis the ‘Cost Inflation Index’, the values for 2012-13 and 2024-25 are 200 and 363, respectively, implying an 81.5% rise in the index. Recent years of persistent inflation have pumped the index up substantially. It’s, therefore, imperative that old slab rates be suitably adjusted without further delay. The table below highlights the proposed slabs to reduce the burden on middle class.
To further the argument, the study shows why deductions enhancement is required as the slab under the old regime is unchanged since July 2014.
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The report puts forward some data highlighting that the 80C limit is still at Rs 1.5 lakh set in 2014 and must be enhanced to at least Rs 2 lakh, 80D deductions must be enhanced to Rs 50,000 for general taxpayers and Rs 100,000 for senior citizens considering the rising costs of insurance premia post-Covid. Home loan interest and principal payments should be housed separately in its own section going up to Rs 5 lakh.
The research study suggests that compared to the 2012-13 benchmarks, the 20 percent and 30 percent tax slabs need updating for the old regime. It suggests that income above Rs 18 lakh should be subject to a 30 percent tax rate, while income above Rs 9 lakh should be taxed at a rate of 20 percent. High-income taxpayers prefer the old regime, where tax slabs have been frozen since 2013-14. The paper recommends revising these tax slabs.
The report also emphasizes that inflation has significantly diminished the value of income. It indicates that every rupee earned is now effectively worth only 55 paise in 2024-25 when adjusted for inflation. In practical terms, Rs 10 lakh earned in 2012-13 now has the purchasing power of Rs 5.50 lakh, and Rs 20 lakh is now equivalent to Rs 11 lakh. To put it another way, if someone earned Rs 1 in 2012-13, they would need to earn Rs 1.81 today to maintain the same purchasing power.
New Regime Isn’t Inflation-Adjusted
According to the research, the new tax regime has given the impression of being inflation-friendly. But a closer look at the numbers reveals that the positive impact of the new regime is felt only on incomes up to Rs 15 lakh. Up to this level, the effective tax rates appear to be lower than inflation-adjusted values from 2013-14.
Above the Rs 15 lakh level, there is no inflation adjustment provided by the new regime. However, this is in stark contrast to the old regime, where nothing above Rs 5 lakh is inflation adjusted.
Excess Taxes Are Being Paid
The paper explains that if we assume that income tax brackets are not adjusted for inflation and use 2012-13 inflation numbers as the base, it becomes evident that taxpayers are paying excess taxes. In the old regime, income above Rs 5 lakh is subject to higher taxes, while in the new regime, it’s income above Rs 15 lakh.For example, on an income of Rs 10 lakh, the excess taxes paid in the old regime amount to Rs 43,226, or Rs 3,602 per month. On an income of Rs 20 lakh, the excess taxes are Rs 1.84 lakh in the old regime and Rs 67,978 in the new regime.
The Union Budget 2024-25 will be presented in the Parliament on July 23 and it is expected that the government may introduce some new budget initiatives to spur economic growth. Taxpayers are eagerly anticipating the announcements as inflation and higher interest rates have significantly affected the middle class.
