Any true Tax Relief to Middle Income Group? Compromise with Growth?
This budget dragged expectation of the salaried Middle Class & Upper Middle Class people of receiving a significant Income Tax relief. This is because Indian Economy is now looking for a consumption-push to facilitate rapid growth & for that, availability of spendable money with people needed to be increased. It would be relevant to mention here that since 2014, Modi Government has not offered any significant perceptible financial benefits specifically to the Middle Income Group (MIG) people. Hence, in this budget, it was expected that Finance Minister would perhaps attempt to put some more money in the hands of Middle & Upper Middle Class. And for doing that, only feasible way was to offer them tax-relief. This section of the society is very important as far as consumption push is needed. Middle Class has no hesitation in spending in all sections of the markets starting right from the open fish & vegetables’ market up to the electronics, cars & valuables market. The money, thus, rolls the best from this section, percolating down to the poorer class.
Giving money directly to the poor without identifying individuals’ specific needs doesn’t appear to push the consumption as much as it does if money is put into a Middle Class man’s pocket. This is perhaps because the poor person doesn’t have the outlook to purchase much. But the Middle Income Group man tends to purchase very many things distributing money to the poorer section too. Hence, making the salaried class a bit more affluent by offering them a significant & meaningful Income Tax Relief was expected from Ms. Nirmala Sitharaman in her first budget of the decade.
Apparently she did it. The tax rates got reduced in different income slabs as given below:
0 – 2.5 lacs : it was nil, it is still nil
2.5 lacs – 5 lacs : it was 5%, it is still 5%
5 – 7.5 lacs : it was 20%, it is now 10%
7.5 – 10 lacs: it was 20%, now it is 15%
10 – 12.5 lacs : it was 30%, now it is 20%
12.5 – 15 lacs : it was 30%, now it is 25%
Above 15 lacs : it was 30%, it is still 30%
Table 1.
| Income in Rs. | Tax under old scheme in Rs. | Tax under new scheme in Rs. |
| 2,50,000.00 | 0 | 0 |
| 5,00,000.00 | 12,500.00 (-12,500.00) = 0 | 12,500.00 (-12,500.00) = 0 |
| 5,00,001.00 | 12,500.20 | 12,500.10 |
| Including surcharge @ 4% | 13,000.20 | 13,000.10 |
| 7,50,000.00 | 12,500.00 + 50,000.00 = 62,500.00 | 12,500.00 + 25,000.00 = 37,500.00 |
| Including surcharge @ 4% | 65,000.00 | 39,000.00 |
| 10,00,000.00 | 62,500.00 + 50,000.00 = 1,12,500.00 | 37,500.00 + 37,500.00 = 75,000.00 |
| Including surcharge @ 4% | 1,17,000.00 | 78,000.00 |
| 12,50,000.00 | 1,12,500.00 + 75,000.00 = 1,87,500.00 | 75,000.00 + 50,000.00 = 1,25,000.00 |
| Including surcharge @ 4% | 1,95,000.00 | 1,30,000.00 |
| 15,00,000.00 | 1,87,500.00 + 75,000.00 = 2,62,500.00 | 1,25,000.00 + 62,500.00 = 1,87,500.0 |
| Including surcharge @ 4% | 2,73,000.00 | 1,95,000.00 |
| 18,00,000.00 | 2,62,500.00 + 90,000.00 = 3,52,500.00 | 1,87,500.00 + 90,000.00 = 2,77,500.00 |
| Including surcharge @ 4% | 3,66,600.00 | 2,88,600.00 |
Some people are expecting that income up to Rs 5 lac has been made tax free for each individual tax payer irrespective of their Gross Income. But that is not the case. Had it been so, the person having Gross Income of Rs. 15 lacs, would have been liable to pay tax of Rs. (25,000.00 + 37,500.00 + 50,000.00 + 62,500.00) x 1.04 = 1,75,000.00 x 1.04 = 1,82,000.00 in the new scheme & not Rs. 1,95,000.00 as mentioned by Ms Sitharaman in her budget speech. This proves that rebate of Rs. 12,500.00 is still available under the new scheme only for individuals having Gross Income up to Rs. 5 lacs & not for those whose income is more than 5 lacs.
In spite of that, table 1 clearly indicates that Hon’ble FM has provided substantial income tax relief for each individual tax payer. Ms Sitharaman also elaborated on her budget speech that a person earning a 15 lacs was liable to pay Rs. 2,73,000.00 under the old scheme whereas under the new scheme, such person would have to pay only Rs. 1,95,000.00. She was correct. It can be seen in table 1.
However, there is a glitch in it. The FM has made this new Income Tax scheme optional with the condition that if any tax payer opts for the new scheme of tax rates, he/she would have to forgo benefits of income tax rebates or deductions or exemptions that were & still are available under the old scheme.
Now let us revisit what were the very common deductions available under the old scheme.
- The salaried individuals are eligible to get a standard deduction of Rs. 50,000.00
- Individual salaried tax payers are eligible to get deduction on House Rent Allowance following some complicated formula
- Mediclaim Premiums too get tax benefits up to Rs 25,000.00 under section 80D of IT Act.
- Interest on House Building Loan up to Rs. 1.5 lacs is deductable under section 80D
- Interest on Education Loan up to Rs. 1.5 lacs deductable under section 80E
- Deductions under various other heads like General Provident Fund, Group Insurance Premium, Children’s School Fees, investments in small savings like NSC, PPF etc combined was eligible up to Rs. 1.5 lac under section 80C
There are several other rooms for having tax deductions under the Income Tax Act. All combined, a salaried individual tax payer can avail deductions amounting up to Rs. 5 lacs or even more. On an average, let’s assume that such a person (with Income 15 lac pa) usually avails a deduction of 30% of his / her Gross Income or Rs. 3 lacs whichever is lower. Now, let us re-compute such a person’s tax burden under the old scheme vis-à-vis the new scheme.
Table 2
| Income in Rs. | Taxable income under old scheme in Rs. | Tax under old scheme in Rs. | Tax under new scheme in Rs. |
| 2,50,000.00 | 1,75,000.00 | 0 | 0 |
| 5,00,000.00 | 3,50,000.00 | 5000.00 (-5000.00) = 0 | 12,500.00 (-12,500.00) = 0 |
| 5,00,001.00 | 3,50,000.00 | -do- | 12,500.10 |
| Including surcharge @ 4% | 0 | 13,000.10 | |
| 7,50,000.00 | 5,25,000.00 | 12,500.00 + 5000.00 = 17,500.00 | 12,500.00 + 25,000.00 = 37,500.00 |
| Including surcharge @ 4% | 18,200.00 | 39,000.00 | |
| 10,00,000.00 | 7,00,000.00 | 12,500.00 + 40,000.00 = 52,500.00 | 37,500.00 + 37,500.00 = 75,000.00 |
| Including surcharge @ 4% | 54,600.00 | 78,000.00 | |
| 12,50,000.00 | 9,50,000.00 | 52,500.00 + 50,000.00 = 1,02,500.00 | 75,000.00 + 50,000.00 = 1,25,000.00 |
| Including surcharge @ 4% | 1,06,600.00 | 1,30,000.00 | |
| 15,00,000.00 | 12,00,000.00 | 1,12,500.00 + 60,000.00 = 1,72,500.00 | 1,25,000.00 + 62,500.00 = 1,87,500.0 |
| Including surcharge @ 4% | 1,79,400.00 | 1,95,000.00 | |
| 18,00,000.00 | 15,00,000.00 | 1,12,500.00 + 1,50,000.00 = 2,62,500.00 | 1,87,500.00 + 90,000.00 = 2,77,500.00 |
| Including surcharge @ 4% | 2,73,000.00 | 2,88,600.00 |
From table 2 computations, it is evident that those who were availing 30% of their Gross Income as deductions (including Standard Deduction) under various sections (which is quite natural for almost every such Middle Class individual), would be liable to pay more tax if they opt for the new scheme. Hence, it is normal that they won’t opt for the new Income Tax Scheme & thus are somehow compelled to remain in the old scheme but declare it as their voluntary decision. Here lies the lack of transparency of Sitharaman’s new Income Tax scheme.
It is evident that the Hon’ble FM was well aware that under the new scheme, a huge number of taxpayers would have to pay higher amount of tax & hence, she kept the new scheme optional. Effectively, for all practical purposes, majority of tax payers would practically be forced to choose the old scheme voluntarily. Thus, neither would there be any change in the income tax absolute value nor would they be able to complain against the Government for not offering any practical tax relief. The new IT scheme, thus, is a bit manipulative & not quite straightforward. However, it seems Govt has different objective to keep dual scheme.
People having higher savings are the people who enjoyed more Income Tax deductions till date. From now on, as the new scheme do not provide for any deductions, individuals who expect more deductions would naturally opt for the old scheme. The new scheme is somewhat beneficial only for those who don’t enjoy substantial deductions i.e. those who don’t save or invest. This indirectly means that the new Income tax scheme marks the beginning of a regime in which the Government of India doesn’t encourage savings or investment by MIG people.
It’s also noteworthy that since rebates on House Building Loans would not be available under the new scheme, people won’t perhaps tend to invest in Real Estates too. This might adversely affect the Economy, though indirectly. Whether no rebate on Mediclaim Premiums would hamper business of Medical Insurance Sector too, is, however, debatable. However, this anti-savings signal by the Govt may be interpreted in a different way too. By beginning a rebate-free era, the Govt perhaps wants to mobilize the Economy by encouraging Middle Class to spend on FMCGs more rather than building savings in terms of solid assets or liquid assets in the banks.
However, this new scheme is finally failing to provide any additional funds in the hands of MIG people, but encouraging them to spend more on consumer goods. Thus, it’s sending a self-contradictory message & making the Middle Income Group financially more vulnerable.
Hon’ble FM has made the new IT scheme hassle-free & straightforward by removing scopes of rebates under various sections. Anybody can straightway calculate his / her tax liability on his / her own & deposit it directly. He/she won’t have to consult a tax-consultant for planning his / her investment plans looking forward to maximizing tax benefits under various sections of the Income Tax Act. Thus, if everyone opts for the new scheme, that would limit scopes of tax practitioners. Eventually they too employ people in their farms. Loss of business of tax-consultants may also result in shrinkage of employment to some extent. Moreover, at this moment of slow down, the objective was expected to be pushing up consumption. And hence, it was more desirable to allow some fluid funds in the hands of the Middle Income Group. Making IT return filing hassle-free & tax-structure simple was not the present priority. However, FM didn’t think in that way.
It would be relevant to mention here that WB CM too is not paying the due Dearness Allowance to State Govt employees for last 8/9 years though the Court has directed WB Govt to clear it off. If WB CM finally decides to pay off the due DA to WB Govt employees, WB State Economy too would benefit. The receivable amount by each employee would return to the Economy as they’d purchase goods of all sorts & thus resulting in growth of GST Collection too. WB CM is highly expected to do her bit for the Economic growth instead of dragging State employees behind from the present value. However, in the end of the year, she declared a long span of holidays for Govt employees on account of Saraswati Puja. It appeared as if she wanted to avoid demands & movements by State Employees for some instalments of outstanding DA in the beginning of this year. How long would she deprive them of their due payment?
Debjani Bhattacharyya