Editorial. To tax, and to please

Reducing personal income tax and simplifying individual tax laws should be a priority area in the upcoming Union Budget for 2024-25. It has been five years now since the Centre transitioned domestic companies to a lower tax regime. It is moot if this has led to higher capital investments or job creation by India Inc. But it has certainly led to more pressure on the individual taxpayer to do the heavy lifting on tax collections, while she faces a peak tax incidence of 40 per cent or more. There is acute disenchantment among the middle-class with the last two NDA governments for not giving them any tax concessions. Though individual taxpayers have been offered an exemption-free, new regime, there are not enough incentives to make the switch. Material changes are therefore in order.

Rising cost of living has substantially lifted the threshold income for the salaried class to make ends meet, especially when they migrate to the cities for employment. Tax-payers simply do not find the new tax regime rewarding enough, especially if they’re eligible for exemptions and deductions under the old one. What’s needed are sunset clauses for the popular exemptions/deductions under the old regime while increasing the standard deduction to a respectable level of at least ₹1.5 lakh in the new one, from the current ₹50,000, to incentivise the shift. This will also help cover expenses such as rent which non-salaried professionals are eligible to deduct from their income. The basic slab at ₹3 lakh in the new regime is, again, too low and has not kept pace with inflation. The Centre must consider raising the zero-rated slab to at least ₹5 lakh. Tax incidence on middle-income earners in the new regime is also too high with the 30 per cent rate kicking in at an income level of ₹15 lakh; this needs upward revision to say, ₹20 lakh. Section 80C has outlived its utility and it’s time for a sunset clause. Forced savings in the Employees Provident Fund, Public Provident Fund, insurance-cum-savings plans etc are sub-optimal for young savers targeting inflation-beating returns; they are gravitating towards market-linked products. A high standard deduction can help these savers to invest in instruments of their choice.

If the government is keen to nudge savers towards specific instruments such bank deposits or government bonds, returns on these instruments should be exempt from tax. The deduction on home loan interest in the old regime can be phased out and substituted instead by an interest subvention scheme for one self-occupied property.

Finally, there is a lot of angst about the surcharge on incomes above ₹50 lakh. But this is a levy that needs to be retained. India is home to large income disparities. Making the top percentile of earners part with more for welfare spending on the less well-off is critical to delivering equity, without recourse to draconian methods such as wealth tax.