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Government may increase Tax Exemption Limit to Rs 5 Lakh Under New Tax Regime

Government may increase Tax Exemption Limit to Rs 5 Lakh Under New Tax Regime

Government may increase Tax Exemption Limit to Rs 5 Lakh Under New Tax Regime, The government is poised to introduce a significant change in the new tax regime by potentially raising the tax exemption limit to Rs 5 lakh. This initiative aims to encourage more taxpayers to switch to the new regime, which is designed to minimize exemptions and rebates.

Incentivizing the New Tax Regime

Despite persistent requests to increase the highest tax slab threshold to Rs 20 lakh under the old tax regime, the government seems determined not to alter the existing rates. This strategy is intended to motivate more taxpayers to adopt the new tax regime, which discourages multiple exemptions and rebates.

Boosting Consumption Through Tax Adjustments

The government is exploring ways to enhance the country’s GDP growth by stimulating consumption among the middle class. Lowering personal income tax rates is a primary consideration, as indicated by several government officials. Increasing disposable income for individuals, particularly those in lower earning brackets, is expected to drive up spending.

Proposed Changes in the Upcoming Budget

One key proposal under review for the upcoming budget, likely to be presented in mid-July, involves increasing the tax-free income limit to Rs 5 lakh from the current Rs 3 lakh. This change will apply exclusively to those filing under the new tax regime, aiming to leave more disposable income in the hands of taxpayers.

Final Decision Pending

It’s important to note that a final decision on this proposal will be made closer to the budget presentation date.

Understanding the New vs. Old Tax Regimes

Since Budget 2020, taxpayers have had the option to choose between the traditional tax structure with its built-in provisions for lower tax incidences through specified investments and a new system offering overall lower tax rates without most deductions and exemptions.

Benefits of the Old Tax Regime

Under the old tax regime, taxpayers can benefit from deductions on investments under certain sections and exemptions such as house rent allowance and leave travel allowance.

Limitations of the New Tax Regime

Despite the advantages, the new tax regime has not gained as much traction partly due to the lack of exemptions and rebates that the older system offers. However, the new regime is simpler and aims to create a more straightforward tax filing process.

Highest Tax Slab Unlikely to Change

A second government official has confirmed that requests from industry representatives to reduce the highest individual income tax slab rate from 30 percent to 25 percent under the new tax regime are unlikely to be entertained.

“Adjustments in higher income tax slabs are improbable as the current focus is on boosting consumption among lower-income groups,” the official stated.

Maintaining the Current Rates

Additionally, the government appears disinclined to modify the old tax regime rates, despite appeals to increase the highest income tax slab to Rs 20 lakh from Rs 10 lakh. This decision aims to encourage more people to transition to the new tax regime.

Under the new tax regime, individuals earning more than Rs 15 lakh annually fall under the highest 30-percent tax bracket. In contrast, the older regime imposes the highest slab on earnings above Rs 10 lakh.

Prioritizing Tax Cuts Over Subsidies

A third official highlighted the government’s preference for lowering personal income tax rates over increasing spending on subsidies and other schemes.

“Tax rate reductions are seen as a more effective way to boost consumption rather than excessive spending on welfare schemes, which often suffer from leakages and fail to benefit the targeted recipients fully,” the official explained.

Addressing Low Consumption Growth

The focus on measures to stimulate consumption comes in response to a notable slowdown in private consumption growth, currently around 4 percent—a 20-year low, excluding the pandemic year. This slowdown is occurring despite an impressive GDP growth rate of 8.2 percent in FY24.

In conclusion, the government’s potential move to increase the tax exemption limit under the new tax regime to Rs 5 lakh aims to bolster economic growth by enhancing consumer spending power. By prioritizing tax cuts over subsidies, the government seeks to ensure that the benefits of economic policies directly reach the individuals who need them the most.

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