The government may raise the exemption limit under the new tax regime to Rs 5 lakh; relief unlikely for others.

To boost consumption and address weak middle-class spending, the government is considering lowering certain personal income tax rates, multiple officials have stated.

The Centre is contemplating increasing the income exemption limit to Rs 5 lakh from the current Rs 3 lakh in the upcoming budget, likely to be presented in mid-July. This adjustment would apply only to those filing returns under the new tax regime, aiming to provide more disposable income, particularly for lower earners.

A final decision on this will be made closer to the budget presentation.

If implemented, this move could reduce tax liability by Rs 10,400 (including a 4% Health & Education cess) for individuals with incomes between Rs 7.6 lakh and Rs 50 lakh.

For those earning above Rs 50 lakh and up to Rs 1 crore, the benefit would be Rs 11,440 (including cess and a 10% surcharge). Individuals earning more than Rs 1 crore and up to Rs 2 crore would see a reduction of Rs 11,960 (including cess and a 15% surcharge). For incomes above Rs 2 crore, the benefit would be Rs 13,000 (including cess and a 25% surcharge).

“Increasing the basic tax exemption limit to Rs 5 lakh under the new tax regime is a positive step. It would result in tax savings of at least Rs 10,000 for all individual taxpayers with income above Rs 5 lakh, except those already receiving a rebate on income up to Rs 7 lakh. This change would boost personal disposable income, stimulating spending and investment, which are essential for economic growth,” according to an expert.

Another expert noted that this change would particularly benefit individuals whose income exceeds the rebate limit under section 87A and who opt for the new tax regime.

Budget 2020 allowed individuals to choose between the existing structure with lower tax incidence via specified investments or a new system offering blanket lower tax rates while forgoing most deductions and exemptions.

Under the old tax regime, taxpayers can avail deductions for certain investments and exemptions like house rent allowance and leave travel allowance.

A second official indicated that the Centre is unlikely to reduce the highest individual income tax slab rate under the new tax regime from 30% to 25%.

“Changes in higher income tax slabs are unlikely because a consumption boost is needed for lower-income people,” the official added.

The government is also unlikely to adjust rates under the old tax regime, despite requests to increase the highest income tax threshold from Rs 10 lakh to Rs 20 lakh. This is to encourage more people to move to the new regime, which discourages exemptions and rebates.

Currently, those earning more than Rs 15 lakh annually fall under the highest 30% tax bracket in the new tax regime, while under the old regime, the highest slab applies to earnings above Rs 10 lakh.

The government is prioritizing potentially lowering personal income tax rates over sharply increasing spending on subsidies and other schemes prone to wastage, according to a third official.

“Tax rate cuts are a more effective way to boost consumption rather than splurging on welfare schemes, which are often affected by leakages, preventing the full benefit from reaching those in need,” the official added.

This discussion on measures to aid consumption comes as the country grapples with low private consumption growth of around 4%, a 20-year low outside the pandemic year, despite a world-leading GDP growth rate of 8.2% in FY24.