FM may increase I-T slabs in Budget 2017: Here’s how it will reduce your tax outgo

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Post the demonetization of the high-value currency notes and the drastic measures taken by the government to promote cashless economy to tackle the evil of black money, the jury is still out whether it had a positive impact on the overall economy.

However, as the Budget is coming soon, there are expectations that the government will take some measures to help the common man, especially the salaried class who has rallied behind the government’s decision on demonetization.

“There are lots of expectations from the forthcoming Budget, especially by the individual tax payers. The government, however, has a tough task at hand to balance the tax concessions vis-à-vis the likely revenue loss. Therefore, there may be some revision in the lower tax slab rates to provide relief to the common tax payers,” says Vikas Vasal, Partner & National Leader-Tax, Grant Thornton India LLP.

In fact, “to alleviate the common man’s sufferings and minimize any adverse impact of demonetization on day-to-day lives, the Finance Minister has already hinted in his speeches that income tax slabs could further be increased, lowering the tax burden on taxpayers due to higher revenue being collected on account of cashless systems,” says Gautam Kapil, content head, ClearTax.com.

Orgnisations like FICCI and ICAI have also sent their pre-memorandum Budget recommendations to the Hon’ble FM, in which it has been recommended that the government should consider raising the income tax exemption limit as follows:

Orgnisations like FICCI and ICAI have also sent their pre-memorandum Budget recommendations to the Hon’ble FM, in which it has been recommended that the government should consider raising the income tax exemption limit as follows:

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* Basic exemption limit be increased from Rs.2.5 lakh to Rs.3 lakh.

* Income from Rs.3-10 lakh be taxed at 10% (currently the slab is Rs.2.5-5 lakh).

* Income from Rs.10-20 lakh be taxed at 20% (currently the slab is Rs.5-10 lakh).

* For income beyond Rs.20 lakh, the tax rate should be 30% (currently the slab is Rs10 lakh and above).

“If this happens, it would truly be great news for taxpayers, resulting in tax savings of up to Rs.155,000. This will leave them with more money for savings and investments,” says Kapil.

To illustrate with an example:

Mr. A has a taxable income of Rs.6 lakh. Under the current tax rules, he pays no tax on the first Rs.2.5 lakh of his income. Of the remaining Rs.3.5 lakh, Rs.2.5 lakh fall under the Rs.2.5 – 5 tax slab, for which he pays 10% as tax. This amounts to Rs.25,000. The remaining Rs. 1 lakh falls in the Rs 5-10 slab, and will therefore be taxed at 20%. This amounts to Rs.20,000.

Mr. A’s total tax liability is Rs.45,000 (Rs.20,000+25,000).

Under the proposed tax rate:

Mr. A would pay no tax on the first Rs.3 lakh. The remaining Rs 3 lakh will fall in the Rs 3-10 lakh tax slab, for which he pays 10% as tax. This amounts to Rs.30,000. Mr. A would end up saving Rs.15,000 in tax under the new tax regime!


Similarly, if Mr. A has a taxable income of Rs.10 lakh, he would end up saving tax up to Rs.55,000. In case Mr. A has an income of Rs.20 lakh, he would end up saving up to Rs.155,000 in taxes (assuming the recommended slab rates*).

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In the words of the honorable FM, “What you need is a broader base of economy, for which you need a lower level of taxation.” Therefore, we could be in for a pleasant surprise if the current slab rates are introduced in this year’s Budget.

Note: “To compensate for the revenue loss due to increased slab rates, the government might think of doing away with the current tax rebate of an amount of Rs.5,000 that is available to taxpayers having an income of up to Rs.5 lakh,” informs Kapil.

Therefore, a person with an income of Rs.5,00,000 would end up paying taxes to the tune of Rs.20,000, whereas under the current income tax slab there was a rebate of Rs.5,000 available. (The above tax rates do not include cess)

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