An income tax revamp is expected in the Union Budget. The Income Tax Act of 1961 will be rewritten. The aim? Make the laws concise, easy to follow, and reduce litigation. The momentum is with the new tax regime, introduced in 2020-21, which 72% of taxpayers now prefer, with many more likely to adopt it after the tax cuts in 2024.  

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The new tax regime offers higher tax-free income, fewer deductions, and ease of filing. With next to no deductions and exemptions available in it, taxpayers are spared the cumbersome paperwork of proof submissions. Tax-free income levels are now at ₹7.75 lakh. If we look at the AY 2023-24 data from the Income Tax Department, we see that 70% tax filers reported a taxable income of 5 lakh or less, which means they had no tax liability1. Furthermore, 88% are under the ₹10 lakh limit, and 94% under ₹15 lakh.  

From this, we can deduce that nine in 10 taxpayers are either in a no-tax or a low-tax bracket. Most of them will choose the new regime going forward. And therefore, this provides us the opportunity to look at the behavioral shifts triggered by the new regime in the context of troubling new trends and suggest what more could be done.  

Here are three asks from the Union Budget as far as personal tax is considered.

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Ask #1 — Enhance The 30% Slab To 18 Lakh  

21% Inflation But No Change In 30% Slab  

Slab 

Limit in 2020 

Limit in 2025 

Hike 

0% 

₹ 250,000 

₹ 300,000 

20% 

5% 

₹ 500,000 

₹ 700,000 

40% 

10% 

₹ 750,000 

₹ 1,000,000 

33% 

15% 

₹ 1,000,000 

₹ 1,200,000 

20% 

20% 

₹ 1,250,000 

₹ 1,500,000 

20% 

25% 

₹ 1,500,000 

- 

- 

30% 

> ₹ 1,500,001 

> ₹ 1,500,001 

0% 

The 25% slab was discontinued. 21% calculated as CII growth from 301 to 363. 

The new regime was introduced in 2020. Since then, the Cost Inflation Index (CII) is up 20.59%. Most new regime brackets have been enhanced by at least 20%. Except one. The 30% slab is stuck at the ₹15 lakh level since the start. If we update it by 20%, it needs to be at ₹18 lakh. Without this update, taxpayers with higher income get burdened with a disproportionately higher share of the taxes. More on that in the next point. For the urban salaried—someone with high-interest EMIs, school-going children, and dependent family elders—a higher income compared to the average Indian may offer little consolation due to high inflation in healthcare, education, and costs of living. Such taxpayers, too, deserve some relief. 

Ask #2 — Fix The Brackets, Not Just Tax-Free Income 

To expand on the above point, this is also an ask to make the bracket enhancements secular. There are calls to increase tax-free income to 10 lakh from the current 7.75 lakh. Tax-free income has its benefits. But it is being enabled at the cost of taxpayers on the higher brackets that haven’t been adjusted for inflation for at least half a decade now. To put this into perspective, in AY 2023-24, the bottom 98%2 taxpayers accounted for only 23% of tax payments. The problem isn’t that the other 77% comes from just 2% of taxpayers. The problem is those 2% amount to barely 1.3 million taxpayers. Of them, just 91,000 filers alone—the top 0.1%—with incomes above 1 crore accounted for 58% of income tax collections3 Merely increasing tax-free income without bracket enhancement shifts the income tax burden on those with higher incomes. As per our calculations, all earners above 19 lakh are now paying excess taxes—which we calculated as the difference between inflation-adjusted taxes and actual taxes. For instance, basis the CII, a taxpayer with a taxable income of 25 lakh now pays 37,200 a year in excess taxes.

Ask #3 – Provide A 30% Deduction, Fix The Incentives 

One of the key benefits of the new regime is the absence of deductions and exemptions. But five years later, we’re also seeing some troubling trends emerge. Life insurance penetration is dropping4. ELSS inflows are falling during some tremendous years for equity5. Among those surveyed by BankBazaar, fewer salaried respondents are interested in small savings schemes, and interest in NPS remains low6. We postulate that in the absence of tax deductions, interest in essential protections and long-term savings is declining. In the past year, we’ve had an economic slowdown, declining household savings, and stagnant incomes. Simultaneously, there’s increasing reliance on credit for consumption to a point where delinquencies have started to hurt. These are circumstances where low savings and protections can be particularly damaging for households.  

Excess Taxes Paid Without Inflation Adjustment 

Taxable Income  

 Total Tax In 2020-21  

 Total Tax In 2024-25 

 Indexed Tax Should Be  

 Excess Monthly Taxes  

₹ 1,900,000 

₹ 319,800 

₹ 270,400 

₹ 265,179 

₹ 435 

₹ 2,000,000 

₹ 351,000 

₹ 301,600 

₹ 291,050 

₹ 879 

₹ 2,500,000 

₹ 507,000 

₹ 457,600 

₹ 420,405 

₹ 3,100 

₹ 3,000,000 

₹ 663,000 

₹ 613,600 

₹ 549,760 

₹ 5,320 

₹ 3,500,000 

₹ 819,000 

₹ 769,600 

₹ 679,116 

₹ 7,540 

₹ 4,000,000 

₹ 975,000 

₹ 925,600 

₹ 808,471 

₹ 9,761 

₹ 4,500,000 

₹ 1,131,000 

₹ 1,081,600 

₹ 937,826 

₹ 11,981 

₹ 5,000,000 

₹ 1,287,000 

₹ 1,237,600 

₹ 1,067,182 

₹ 14,202 

Cost Inflation Index: 363 (2024-25) and 301 (2020-21). 2020-21 used as base year. 

The point can be made that deductions tied with the right incentives are necessary for fixing this problem. Traditionally, tax deductions have been linked to insurance and savings. The absence of one may be hurting the other. While the new regime had no deductions to start with, a few have now been added. More are needed. In the interest of simplification, a flat deduction of 30% of the gross income should be provided to include long-term savings, essential insurance, healthcare and education costs, and loan payments without confusing caps and sub-limits. The deduction can be capped at 15 lakh to ensure equity among income levels. 

The problem of tax rates also needs to be seen from the perspective of the government. Net income tax collections grew 25% last year. The share of direct taxes in total taxes has risen to a 14-year high of 56.72%, and the largest contributor to this growth is income tax, which provides 54% of all direct taxes. These taxes are necessary for building the physical and digital infrastructure driving India into its future. The government must ensure robust revenue generation. But with income tax, we are at an inflection point. Relief is due in some quarters.  

The writer is CEO, BankBazaar.com