Income tax predictions for the 2024 budget: Consider a job where your annual salary decreases every year. Will you stay in this kind of work? For the majority of us, the response is going to be a resounding “No.” Greetings from inflation 101! Your real wages have decreased if you consistently earn the same amount of money since you can no longer purchase the same assortment of things.
The same idea holds true for the Rs 15 lakh tax threshold; given that India’s CPI has been fluctuating between 4 and 8% annually over the last few years, the average person’s after-tax income is insufficient. This burden may be lessened if the new tax regime’s Rs 15 lakh threshold were raised to Rs 20 lakh.
Under the Finance Act, 2020, the government introduced an optional new tax regime that allows individuals and Hindu Undivided Families (HUF) to apply for lower tax rates in exchange for giving up certain exemptions and deductions, including 80C, medical insurance, house rent allowance, and interest on self-occupied property. Tax rates are allocated according to different slab rates under this regime, which range from five percent to thirty percent in situations where the yearly taxable income surpasses Rs 15 lakh. For taxpayers who do not claim expenditures or investment benefits, the new tax structure makes sense.
In order to increase the profitability of the new tax system, the Finance Act 2023 lowered income tax rates and tax slabs from six to five. An annual standard deduction of Rs 50,000 is permitted under the simplified regime. Unless the taxpayer specifies otherwise, the new tax system is regarded as the default tax regime. When filing annual income tax returns, individual taxpayers and HUFs can still choose to use the previous tax system if their claims for allowable deductions and exemptions result in a lower tax outflow. A clear goal for the tax authorities is to have a wider adoption of the new tax structure. Periodically raising the ceiling limit in accordance with inflation will promote adoption by demonstrating a practical and taxpayer-friendly strategy.
Income tax slabs for FY 2022–2023 (AY 2023–2024) under the new tax regime
The income tax slabs under the new tax regime are not the same as those listed above for FY 2022–2023 (which ends on March 31, 2023) and earlier. It is noteworthy that individuals who intend to choose the new tax regime and earn any income during FY 2022–2023—that is, from April 1, 2022, to March 31, 2023—must compute their income tax using the income tax slabs listed below:
|Income tax slabs (Rs)
|Income tax rate (%)
|From 0 to 2,50,000
|From 2,50,001 to 5,00,000
|From 5,00,001 to 7,50,000
|From 7,50,001 to 10,00,000
|From 10,00,001 to 12,50,000
|From 12,50,001 to 15,00,000
|From 15,00,001 and above
The capital gains tax system already incorporates this idea of inflation adjustment. The asset seller can mitigate the effects of inflation while calculating capital gains by adjusting the asset’s acquisition cost in accordance with the cost inflation index. It makes sense to apply this idea to the new income tax system. Tax outflow for all income levels was decreased thanks to recent adjustments to the income tax slabs and rates. However, because of a 30% tax expense, these tax savings are lessened as income rises. So, it’s time to review the mentioned cutoff.
By raising the tax threshold from time to time, you can help keep taxpayers’ real income levels stable and avoid unintentionally raising their tax burden as inflation gradually reduces money’s purchasing power.
Moreover, one of the main forces behind economic activity is consumer spending. Should the minimum income tax level fail to keep up with inflation, taxpayers might find their disposable income decreasing, which would result in less expenditure.
Economic inequities may also result from the minimum income tax threshold not being updated for inflation. Inequality may worsen if low- and middle-class taxpayers are forced into higher tax bands.
The minimum income tax threshold needs to be updated for inflation in order to prevent people from having to pay more in taxes. A minimum income tax threshold that is updated for inflation not only protects taxpayers against an unwarranted rise in their tax liability but also fosters a more equal and vibrant economic environment.