A Historic Budget Acknowledges Your Contribution And Burden

Of course, the introduction of the New Tax Regime, which pushed the highest tax slab – where income is taxed at 30%  –  to above Rs 15 lakh, was a welcome introduction. The increase in deductions even sweetened the shift away from the Old Tax Regime. But really, not much changed for the taxpayer – especially in the middle-income segment. Data shows that this is the segment of taxpayers that contributes a bulk of the tax paid by individuals. Finance Minister Nirmala Sitharaman acknowledged this contribution in her Budget speech this weekend, saying the government appreciates the part the middle class plays in nation building.

The sweeping changes that were announced were an acceptance that this segment was bearing too much of the burden. In case you missed the announcements or would like a recap, here’s what was announced:

First and most importantly, in the New Tax Regime, starting from the next financial year, a rebate is received on tax on income up to Rs 12 lakh. This means that individuals earning a total of Rs 12 lakh in taxable income will not pay any tax. There are a few aspects to bear in mind though. This does not relate to income that is taxed at “special” rates – read: capital gains or profit from gambling activity, which also includes gains from cryptocurrency trade. You won’t get a rebate on those.

But on anything that is charged at the income tax slab rates, you won’t pay tax on income up to Rs 12 lakh. Here are a couple of illustrations that’ll make this easier to understand: a. You earn Rs 10 lakh in taxable income from your salary. You also made a profit of Rs 3.25 lakh from selling equity after holding for over a year. In this case, the long-term capital gains from the sale of equity would be taxed at 12.5%. And you would pay no tax on the rest of your income.

b. You earn Rs 10 lakh taxable income from your salary. You also earn Rs 2 lakh from interest earned and capital gains from your fixed income mutual funds. Remember, the gains from the latter are taxed at slab rate and so, your taxable income for the year would rise to Rs 12 lakh. In this case you would still pay no tax because of the newly introduced rebate.

If this were the only big change, it would still be a landmark announcement. But in that case, the benefit would be restricted to only those with taxable income of less than Rs 12 lakh. But there is so much more! The tax slabs have been widened substantially in the New Tax Regime. The lowest slab has risen to Rs 0 to Rs 4 lakh from Rs 0 to Rs 3 lakh and every slab above that has been widened too. Income above Rs 4 lakh and up to Rs 8 lakh is taxed at 5%, above Rs 8 lakh and up to Rs 12 lakh at 10%, above Rs 12 lakh and up to Rs 16 lakh is at 15%, above Rs 16 lakh and up to Rs 20 lakh at 20%, above Rs 20 lakh and up to Rs 24 lakh at 25% and the highest bracket is now income above Rs 25 lakh. Remember, these slabs only come into play when your taxable income is above Rs 12 lakh.

Now, here’s why this is such an important reform: In 2010, Rs 10 lakh was considered a sizeable salary. And that’s why, a couple of years later, the government decided to push the highest tax bracket to income above Rs 10 lakh, which was taxed at 30%. If you account for inflation at 7% per year over the past 15 years, that Rs 10 lakh would be equivalent to Rs 24-25 lakh today.

This is a major relief. Think about it – if individuals in the highest tax bracket, which was above Rs 15 lakh in the current year’s New Tax Regime, got a 10% raise, their incomes would only rise by about 7% post tax. And with that increase, they’d only be able to maintain their lifestyle. And that’s assuming that the inflation they’re facing is 7%. In the larger cities, expenses for rent and medical services rise much more.

Of course, the introduction of the New Tax Regime, which pushed the highest tax slab – where income is taxed at 30%  –  to above Rs 15 lakh, was a welcome introduction. The increase in deductions even sweetened the shift away from the Old Tax Regime. But really, not much changed for the taxpayer – especially in the middle-income segment. Data shows that this is the segment of taxpayers that contributes a bulk of the tax paid by individuals. Finance Minister Nirmala Sitharaman acknowledged this contribution in her Budget speech this weekend, saying the government appreciates the part the middle class plays in nation building.

The sweeping changes that were announced were an acceptance that this segment was bearing too much of the burden. In case you missed the announcements or would like a recap, here’s what was announced:

First and most importantly, in the New Tax Regime, starting from the next financial year, a rebate is received on tax on income up to Rs 12 lakh. This means that individuals earning a total of Rs 12 lakh in taxable income will not pay any tax. There are a few aspects to bear in mind though. This does not relate to income that is taxed at “special” rates – read: capital gains or profit from gambling activity, which also includes gains from cryptocurrency trade. You won’t get a rebate on those.

But on anything that is charged at the income tax slab rates, you won’t pay tax on income up to Rs 12 lakh. Here are a couple of illustrations that’ll make this easier to understand: a. You earn Rs 10 lakh in taxable income from your salary. You also made a profit of Rs 3.25 lakh from selling equity after holding for over a year. In this case, the long-term capital gains from the sale of equity would be taxed at 12.5%. And you would pay no tax on the rest of your income.

b. You earn Rs 10 lakh taxable income from your salary. You also earn Rs 2 lakh from interest earned and capital gains from your fixed income mutual funds. Remember, the gains from the latter are taxed at slab rate and so, your taxable income for the year would rise to Rs 12 lakh. In this case you would still pay no tax because of the newly introduced rebate.

If this were the only big change, it would still be a landmark announcement. But in that case, the benefit would be restricted to only those with taxable income of less than Rs 12 lakh. But there is so much more! The tax slabs have been widened substantially in the New Tax Regime. The lowest slab has risen to Rs 0 to Rs 4 lakh from Rs 0 to Rs 3 lakh and every slab above that has been widened too. Income above Rs 4 lakh and up to Rs 8 lakh is taxed at 5%, above Rs 8 lakh and up to Rs 12 lakh at 10%, above Rs 12 lakh and up to Rs 16 lakh is at 15%, above Rs 16 lakh and up to Rs 20 lakh at 20%, above Rs 20 lakh and up to Rs 24 lakh at 25% and the highest bracket is now income above Rs 25 lakh. Remember, these slabs only come into play when your taxable income is above Rs 12 lakh.

Now, here’s why this is such an important reform: In 2010, Rs 10 lakh was considered a sizeable salary. And that’s why, a couple of years later, the government decided to push the highest tax bracket to income above Rs 10 lakh, which was taxed at 30%. If you account for inflation at 7% per year over the past 15 years, that Rs 10 lakh would be equivalent to Rs 24-25 lakh today.

This is a major relief. Think about it – if individuals in the highest tax bracket, which was above Rs 15 lakh in the current year’s New Tax Regime, got a 10% raise, their incomes would only rise by about 7% post tax. And with that increase, they’d only be able to maintain their lifestyle. And that’s assuming that the inflation they’re facing is 7%. In the larger cities, expenses for rent and medical services rise much more.

The question that arises now, though, is what you’re going to do with the money you save in tax next year. The finance minister and stock market investors are hoping that you’ll go out and spend. That’s why a great deal of attention has shifted towards listed companies in the consumption space.

The prudent thing to do, of course, is to save a percentage of it!

The other point to note is that your tax saving investments, and indeed the Old Tax Regime, now becomes redundant. So, if you were allocating a certain amount of money towards equity linked savings schemes or five-year fixed deposits, you should now look for other options.

The government has also added provisions to make things easier when it comes to tax deducted at source and collected at source. For one, the threshold for collection of tax when you’re using the Liberalised Remittance Scheme has been raised to Rs 10 lakh from Rs 7 lakh. And the limit for tax deduction on interest for senior citizens is being doubled to Rs 1 lakh.

This week will see the first outline of the new Income Tax Bill. The finance minister said it would revolutionise the archaic law, simplifying language and making it easier to understand and follow. It will also work towards adding more people to the tax net, plugging holes that currently exist. The Bill is likely to be introduced on Feb 6.

At the end of the week is the outcome of the Reserve Bank of India Monetary Policy Committee’s meeting to decide on policy interest rates. After recent measures to bolster system liquidity, there are some expectations that the committee will also reduce interest rates. That would be beneficial for borrowers, but not so good news for depositors. But more importantly, it should serve to spur growth in the new financial year.