Budget expectation 2022: Taxpayers await changes in income tax slabs, rates

The basic personal tax exemption limit was last revised in 2014. Presenting the first budget of Prime Minister Narendra Modi-led government in 2014 the then Finance Minister Arun Jaitley raised the basic income tax exemption limit from ₹2 lakh to ₹2.5 lakh. For senior citizens, the exemption limit was increased from ₹2.5 lakh to ₹3 lakh. The basic exemption limits have not been changed since then.

Nirmala Sitharaman is set to present her fourth union budget on February 1, 2022. Some analysts feel that the finance minister may announce major relief to taxpayers.

The expected relief include an increase in the basic exemption limit from ₹2.5 lakh to ₹3 lakh. For senior citizens, it is likely to be increased to ₹3.5 lakh from the present ₹3 lakh.

The top income slab is also likely to be revised upward from the existing ₹15 lakh.

According to a pre-budget survey conducted among different stakeholders by KPMG recently, the majority (64 per cent) of respondents expect an enhancement in the basic income tax exemption limit of ₹2.5 lakh.

“Our pre-budget survey indicates that relief for individual taxpayers by way of an enhancement in the basic income tax exemption limit of ₹2.5 Lakh is highly awaited. Respondents also support an upward revision in the top income slab of Rs10 lakhs,” said Rajeev Dimri, Partner and National Head of Tax, KPMG in India.

Although Sitharaman has not changed tax slabs and rates, she introduced a new tax regime in budget 2020. Under the new tax regime, the tax rates are reduced for those willing to forego tax exemptions and deductions.

The new tax regime remains optional for taxpayers. This means a taxpayer has the option to either stick to the old regime or choose the new one.

Currently, income upto ₹2.5 is exempt from taxation under both regimes. Income between ₹2.5 to ₹5 lakh is taxed at the rate of 5 per cent under the old as well as the new tax regime.

Personal income from ₹5 lakh to ₹7.5 lakh is taxed at a rate of 20 per cent under the old regime, while under the new regime the tax rate stands at 10 per cent. Income between ₹7.5 lakh to ₹10 lakh is taxed at a rate of 20 per cent in the old regime, while in the new regime the tax rate stands at 15 per cent.

Under the old regime personal income above ₹10 lakh is taxed at a rate of 30 per cent. However, under the new regime, there are three slabs above ₹10 lakh. Personal income between ₹10 lakh and ₹12.5 lakh is taxed at a rate of 20 per cent under the new regime. Income from ₹12.5 lakh to ₹15 lakh is taxed at 25 per cent and income above ₹15 lakh is taxed at a rate of 30 per cent.

The effective tax rate is much higher due to cess and surcharges.

An individual with a net taxable income of up to ₹5 lakh is allowed to avail tax rebate of up to ₹12,500 under Section 87A in both the old as well as the new tax system. So effectively, the tax liability of individuals with income up to ₹5 lakh is zero under both the tax regimes.

The limit for deduction under Section 80C has also remained unchanged since 2014. In the 2014 budget, the 80C deduction limit was increased to ₹1.5 lakh from ₹1 lakh, while the deduction limits for interest on the home loan was increased to ₹2 lakh from ₹1.5 lakh.

Both these deductions remain unchanged since 2014. However, some additional deductions have been introduced in the subsequent budgets. In the 2015 budget, the government introduced an additional deduction of ₹50,000 for contribution under the National Pension Scheme (NPS) under Section 80 CCD. The deduction limit on health insurance premiums was also increased from ₹15,000 to ₹25,000.

Major steps towards simplification and rationalisation of the income tax regime are also expected in this year’s budget.

In the Budget 2020-21, around 70 exemptions and deductions of different nature were removed. The finance minister had announced that the “remaining exemptions and deductions will be reviewed and rationalised in the coming years with a view to further simplifying the tax system and lowering the tax rate.”

In the 2021-22 Budget the finance minister did not make any significant change in the income tax rates or slabs.

“Although the Government has taken several measures to resolve tax disputes and overhaul the tax dispute resolution framework over the past few years, further measures in this regard may help in reducing litigation. Rationalisation of TDS and TCS provisions to ease compliance burdens will also be welcome,” said Dimri.