Budget 2025: Major relief for income tax payers, or is it?

Prime Minister Narendra Modi had on Friday hinted at a tax bonanza when he said Lakshmi, the Hindu goddess of wealth, would be especially generous towards the poor and middle classes in the Union Budget.

It did not, therefore, come as a surprise when Union finance minister Nirmala Sitharaman announced today that there would be no income tax payable up to an annual income of Rs 12 lakh. Salaried employees with an income of 12.75 lakh a year would be able to make use of Rs 75,000 as standard deduction, up from Rs 50,000.

As part of the ‘good news’, the finance minister also announced significant changes in income tax rates for different income slabs. The government hopes to thus boost household savings, consumption and investment.

The market, however, was lukewarm to the announcement, adding to the suspense and raising doubts about whether there was a catch in the fine print.

If the taxable income is even a rupee more than Rs 12 lakh per year, the tax payer in this new fiscal year will pay taxes as per the new slabs. Earlier, those with an income of Rs 12 lakh were paying around Rs 80,000 per annum as income tax.

Now, if the income tax is Rs 12.01 lakh, say, the tax liability will be Rs 61,500. Because tax payable will be calculated at the rate of five per cent on income between Rs 4 lakh and 8 lakh, 10 per cent on income between Rs 8 lakh and 12 lakh, and 15 per cent on income between Rs 12 lakh and 16 lakh.

An individual tax payer earning Rs 15 lakh will, therefore, end up paying tax of Rs 1,05,000. While earlier incomes above Rs 15 lakh were taxed at 30 per cent, the finance minister has proposed to tax income between Rs 16 lakh and 20 lakh at 20 per cent and between Rs 20 lakh and 24 lakh at 25 per cent. The highest income tax slab of 30 per cent rate will now be applicable only for income above Rs 24 lakh.

The limit for tax deduction on interest for senior citizens is also proposed to be doubled from the present Rs 50,000 to Rs 1 lakh. Similarly, the proposals include annual limit of Rs 2.40 lakh for TDS on rent to be increased to Rs 6 lakh.

While the apparent tax relief comes at a time when salaries and income have been stagnant for the past several years, there is also scepticism that such sops may not be sufficient to boost the economy, consumption, and savings.

While income tax collections have been rising steadily over the past five years, the number of income tax payers declined to 2.8 per cent Indians in the assessment year 2023-24, falling from a peak of 3.6 crore in 2019-20.

Is tax relief to less than three per cent Indians fair? What is more, will it have any impact on macro-economic conditions to boost domestic demand and private investment? Why is the finance minister hopeful of collecting more income tax despite slashing the rates?