Amid rising inflation and high taxes, there is an urgent need to update the tax slabs and increase the amount of deductions available, according to a recent report by BankBazaar. The report emphasizes that the new tax regime has not been popular with salaried taxpayers, making it necessary to improve deductions in the old tax regime, which most taxpayers still prefer.
The old tax regime offers a variety of tax deductions, including those for loan payments, insurance premiums, tax-saving investments like provident funds, tuition fees, and medical expenses. These deductions significantly reduce tax liability for many taxpayers, making the old regime more attractive compared to the new regime, which offers fewer deductions.
The report highlights how inflation has severely reduced income value. According to the report, every rupee earned now is effectively worth only 55 paise in 2024-25 when adjusted for inflation. This means that ₹10 lakh earned in 2012-13 is now effectively worth ₹5.50 lakh and ₹20 lakh is worth ₹11 lakh. To maintain the same purchasing power as in 2012-13, one would need to earn ₹1.81 for every rupee earned back then.
Although the new tax regime appears to be inflation-friendly at first glance, its benefits are mainly felt by those with incomes up to ₹15 lakh. For incomes above this level, there is no provision for inflation adjustment, making the regime less beneficial for higher earners.
The report also points out that tax slabs in the old regime have remained unchanged since 2013-14. It suggests that the highest tax rate of 30 percent should be applied to incomes above ₹18 lakh, and a 20 percent tax rate to incomes above ₹9 lakh. The current 0 percent tax slab for incomes under ₹2.5 lakh, unchanged since July 2014, should be raised to ₹5 lakh. Furthermore, a 5 to 10 percent tax should be levied on incomes between ₹5 lakh and ₹9 lahks, 20 percent on incomes between ₹9 lahks and ₹18 lahks, and 30 percent on incomes above ₹18 lakh.
Recommendations for Enhancements in Deductions
The report lists four key enhancements needed in tax deductions:
1. Increase in 80C Limit: The deduction limit under Section 80C should be raised from ₹1.5 lakh to at least ₹2 lakh, as the current limit was set in 2014.
2. 80D Deductions: Deductions for health insurance premiums under Section 80D should be increased to ₹50,000 for general taxpayers and ₹1 lakh for senior citizens, considering the rising insurance costs post-pandemic.
3. Home Loan Interest and Principal Payments: These should be classified in a separate section with a combined deduction limit increased to ₹5 lakh.
4. Rebates under 87A: These should be extended to incomes up to ₹6.3 lakh, in line with the last update made in 2019.
BankBazaar’s report calls for significant changes in the tax structure to better align with current economic conditions and inflation impacts. By updating tax slabs and enhancing deductions, the government can provide much-needed relief to taxpayers and make the tax system more equitable and efficient.
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