Government May Cut Personal Income Tax, Slabs May Change: Report

Government is considering tax relief for individuals as it looks at measures to accelerate consumer demand and boost economic growth, people with direct knowledge of the matter said.

Prime Minister Narendra Modi's government is mulling a proposal to hike the taxable income limits, especially the Rs 10 lakh slab, which attracts a 30 per cent rate at present, the people said, asking not to be identified as the discussions are private. The move will be accompanied by scrapping some tax breaks, including the one offered on house rent payments and interest earned on some bank deposits.

The measures may form part of the federal budget to be unveiled in February, the people said. A spokesman for the finance ministry couldn't be immediately reached for a comment.

If the government tinkers with personal taxes, it will add to the list of measures taken in recent months to boost growth that's expanding at the slowest pace in nearly six years. Apart from last month's cut in corporate taxes, the government has also rolled back a levy on foreign funds, injected $10 billion into banks, relaxed foreign direct investment rules, and merged state-run lenders.

A steep reduction in corporate tax rate to 22 per cent meant companies pay taxes at a lower rate than many individuals who are in the top 30 per cent rate bracket. That's raised the clamour for a relief in personal income tax rates.

As Finance Minister Nirmala Sitharaman aims to narrow the fiscal deficit to 3.3 per cent of the gross domestic product this year, the government has limited fiscal space for fresh giveaways after the $20 billion corporate tax stimulus. It's now banking on companies and individuals to boost consumption and add to revenue collections.

Personal tax kicks off on income above Rs 2.5 lakh a year, levied at 5 per cent. Top marginal tax rate in India is 42.74 per cent for income above Rs 5 crore. That's higher than the Asia average of 29.99 per cent, according to data compiled by KPMG. Only about 5 per cent of the population pays taxes and the country's tax-to-GDP ratio of about 11 per cent ranks lower than the global average.