Some income tax slabs are unchanged for a decade. The 20% and 30% slabs were last revised in 2013. In 2023, income above Rs 5 lakh is taxable at 20%, and income above Rs 10 lakh is taxable at 30%.
Ten years later, they’re still the same.
For the taxpayer, it means that when their incomes are adjusted for inflation, they pay a higher ‘real’ rate of tax.
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The highest marginal rate of income tax is 30% with applicable surcharge and cess. But since tax brackets are frozen in 2013, we calculated that anyone in the 30% bracket is essentially paying a 42% to 50% slab rate.
We calculated that anyone with a taxable income of Rs 12 lakh, for example, is paying excess taxes of Rs 49,327 or Rs 4111 per month.
However, the lack of inflation adjustment in the tax brackets impacts everyone earning more than Rs. 5 lakh. For example, someone earning Rs. 7.5 lakh pays excess taxes of Rs. 852 per month.
What needs to be done to address this?
Tax Brackets Need to Be Enhanced
The tax brackets in the old regime, which is still preferred by the vast majority of income taxpayers, need enhancements.
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Over the last 10 years, all enhancements in this regime had been done to address the needs of people with incomes under Rs 5 lakh. However, with inflation, incomes have also grown. And so, the brackets should be expanded and taxes lowered at all income levels.
If we used the 2013-14 slabs are benchmarks, as per BankBazaar calculations, the tax brackets should have expanded to the following.
These calculations are merely inflation-adjustment of the slabs from 2013-14 and nothing else. The inflation figures are as per the Cost Inflation Index, which has increased from 220 to 331 in this decade-long period.
It implies a cost inflation of 50.45% over 10 years. Therefore, the slabs too should be up at least 50% simply to account for inflation.
Excess Taxes Paid Without Inflation Adjustment
Someone with a taxable income of Rs 10 lakh today pays Rs 2333 per month more as excess taxes. At Rs 25 lakh, it’s Rs 15,661 per month. At Rs 50 lakh, it’s Rs 37,784 per month.
Essentially, someone in the 30% slab today is paying a real rate of 42-50% without inflation adjustment.
New Regime Not Enough
The taxpayer preference is overwhelmingly for the old regime. It demonstrates that the current tax brackets offered by the new regime aren’t enough to attract more taxpayers.
The new regime actually does well in helping taxpayers reach an inflation-adjusted rate of tax. This appears to be happen on incomes up to around Rs 12 lakh. However, despite this, taxpayers tend to pick the old regime.
Above that level of income, even the new regime with bigger tax brackets fails to provide inflation-adjusted tax benefits.
Time For Enhancements
Tax brackets haven’t kept pace with inflation. In fact, having the old regime brackets frozen in 2013 prevents people from earning meaningful tax breaks. One hopes that enhancements of these brackets will be provided in 2023.
(The writer is CEO, BankBazaar.com)