Every July, the conversation around income tax in India feels different. A decade ago, people asked how to save tax. They wanted to know which insurance policy to buy or how to get the maximum benefit out of Section 80C. Today, the most common question is much simpler. People just want to know if they have to pay tax at all.
That question is now being debated globally too. Jeff Bezos recently argued that the US tax system needs a major rethink, suggesting that the bottom 50% of American earners should pay zero federal income tax. In India, however, this is no longer a theoretical debate. For a large section of taxpayers, especially salaried earners under the new regime, the zero-tax reality has already arrived.
The Indian tax system has changed in ways many people have not fully realized. Today, a person earning Rs 1 lakh a month often owes nothing to the government. By increasing the effective tax free limit to Rs 12 lakh under the new tax regime, the government has created a system where about 84% of taxpayers potentially fall under the zero tax bracket. We achieved this major shift two years ago, fundamentally changing how the majority of the country files their returns.
Who actually gained from Rs 12 tax-free income
The biggest beneficiaries of this shift are easy to spot. The young salaried professional earning between Rs 7 lakh and Rs 15 lakh a year is a clear winner. Ten years ago, their old regime deductions never matched the standard deduction they now receive automatically. For them, the new system is simpler and better.
The first time tax filer is the second winner. A young adult starting their first job does not need to learn complex tax sections like 80C or HRA. They look at their Form 16, choose the new regime, and finish the process. The system has finally caught up with how this generation actually lives and saves.
Senior citizens with a modest pension have also benefited. Higher basic exemption limits and a reduced compliance burden make retirement less focused on paperwork. If you fall into any of these groups, the tax system today is much kinder to you.
Who quietly lost ground
Every tax reform creates groups that do not gain. We must talk about them too. The first is the taxpayer with a large home loan who prefers the old regime. The interest deduction on a home loan, combined with rent allowance and health insurance, often makes the old regime better for them. They have not lost money, but they have lost the simplicity their colleagues enjoy.
The second group is the dedicated saver. The tax code used to reward people for long term saving through Section 80C. The new regime does not care how you use your money. It is simpler, but it removes that extra push for financial discipline.
The third group is the modern earner whose income does not fit the standard salaried model. This includes freelancers, gig workers, and stock traders. For them, choosing a tax regime is just one of many complex decisions. Capital gains taxation has actually become more complicated, with short term equity gains taxed at 20% and long term at 12.5%. For an investor relying on capital gains, the headline tax exemptions do not apply cleanly.
What we have built and what we have not
Has India taken its lower income group to zero tax? Yes, it absolutely has. With the effective tax free limit at Rs 12 lakh, the government has ensured that the 84% to 90% of taxpayers earning below this threshold are completely out of the tax net. We have taken thousands of salaried Indians to a place where their tax liability is zero.
However, we have done it unevenly. Salaried individuals gain the most, while people with multiple income streams have not seen their lives simplified. The direction of the reform is completely right, and saving working Indians from heavy compliance is a very good thing.
But the modern Indian taxpayer is no longer typical. Their income comes from multiple places, and their financial life does not look like a basic Form 16. The next stage of reform has to focus on them. Their tax return is complicated because the economy they live in is complex.
Is zero really better than one?
In global financial circles, there is a renewed debate about whether lower income earners should pay zero income tax. For Indian taxpayers, this is not a theoretical talking point. We already achieved this shift two years ago, fundamentally changing how the majority of the country files returns.
By keeping millions of people out of the tax net entirely, the government also avoids the hassle of processing refunds tied to nearly Rs 1 lakh crore in forgone revenue. This speeds up the entire compliance process for those who actually have complex tax liabilities.
Moving forward, the debate is no longer about whether zero is better than one. The real challenge is ensuring that as our economy grows, our tax system simplifies life not just for the standard earner, but for the modern taxpayer whose income is a complex mix of multiple salaries, trading income and investments.
(The author is founder and CEO of ClearTax)
Disclaimer: The views expressed in this article are solely those of the author and do not reflect the official policy, editorial position or views of Financial Express. The article is intended for informational purposes only and should not be construed as tax, legal or financial advice.
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