Date: December 27, 2024
India Considers Income Tax Cuts for Middle Class
India Considers Income Tax Cuts for Middle Class to Boost Consumption
The Indian government is reportedly deliberating on reducing income tax rates for middle-class individuals to encourage spending and stimulate economic growth. According to a Reuters report, this potential reform could provide significant relief for taxpayers earning up to ₹15 lakh per year.
Current Tax Regimes and Options
Under the current tax structure introduced in 2020, individuals earning between ₹3 lakh and ₹15 lakh annually are taxed at rates ranging from 5% to 20%, while incomes exceeding ₹15 lakh are taxed at 30%. Taxpayers have the option to choose between:
- Legacy Tax System: Offers exemptions for housing rentals, insurance, and other benefits.
- New Tax System (2020): Features lower rates but restricts major exemptions.
The government is expected to finalize its decision on tax reforms before the Union Budget announcement on February 1, 2025.
Updates on Income Tax Laws (July 2024)
Recent updates to the income tax laws, effective for the 2024-25 fiscal year, already provide increased benefits for taxpayers. Key changes include:
- Revised Tax Slabs:
- 0% for ₹0–₹3,00,000
- 5% for ₹3,00,001–₹7,00,000
- 10% for ₹7,00,001–₹10,00,000
- 15% for ₹10,00,001–₹12,00,000
- 20% for ₹12,00,001–₹15,00,000
- 30% for incomes above ₹15,00,000
- Standard Deduction Increase:
- Raised to ₹75,000 from ₹50,000 for salaried individuals.
- Increased to ₹25,000 from ₹15,000 for family pensioners.
- Higher NPS Deduction:
- Employees can now claim a deduction of up to 14% of their basic salary for employer contributions to the National Pension System (NPS), up from the previous 10%.
Capital Gains Tax Adjustments
- Short-Term Capital Gains:
- Taxed at 20% for equity and equity-oriented mutual funds, an increase from the previous 15%.
- Gains from other assets are taxed based on applicable income tax slabs.
- Long-Term Capital Gains:
- Taxed at 12.5%.
- Equity and equity-oriented mutual funds are exempt from tax up to ₹1.25 lakh per financial year, up from ₹1 lakh previously.
Potential Impact on Taxpayers
These reforms, including the possibility of further reductions, are aimed at providing middle-class taxpayers with greater savings and enhanced disposable income. With increased standard deductions and adjustments in capital gains taxes, individuals can expect to retain more of their earnings while contributing to economic growth through higher consumption.
Stay tuned for updates as the government makes its final decisions on these tax reforms.