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Budget 2025: Calls to Raise Income Tax Exemption Threshold to Rs 5.7 Lakh and Simplify TDS

As the Union Budget 2025 approaches, there are growing calls for significant reforms to India’s income tax system. Tax experts and industry bodies are urging Finance Minister Nirmala Sitharaman to consider raising the income tax exemption threshold and simplifying the Tax Deducted at Source (TDS) framework. These proposed changes aim to provide relief to taxpayers, boost consumption, and streamline tax compliance.

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One of the key recommendations comes from the Global Trade Research Initiative (GTRI), a prominent think tank. The GTRI suggests raising the income tax exemption threshold from the current Rs 2.5 lakh to Rs 5.7 lakh to account for inflation since 2014. This adjustment would help maintain the real value of the tax exemption and protect the purchasing power of taxpayers.

Proposed Changes to Income Tax Exemption Threshold.

Current Exemption LimitProposed Exemption LimitRationale
Rs 2.5 lakhRs 5.7 lakhAdjustment for inflation since 2014
Unchanged since 2014Reflects real valueMaintains purchasing power parity
Applies to old tax regimeSuggested for both regimesSimplifies tax structure

The Case for Raising the Income Tax Exemption Threshold.

The income tax exemption threshold has remained unchanged at Rs 2.5 lakh since 2014. However, considering an annual inflation rate of 5.7%, the real value of this exemption has eroded significantly over the past decade. In today’s terms, Rs 2.5 lakh in 2014 is equivalent to just Rs 1.4 lakh, highlighting the need for an upward revision.

Ajay Srivastava, Founder of GTRI, explains, “Inflation is a major worry for everyone. We suggest raising tax exemptions to match inflation. These reforms will create a fairer tax system, encourage savings, and support economic growth.”

By increasing the exemption threshold to Rs 5.7 lakh, the government would effectively restore the purchasing power of taxpayers to 2014 levels. This move could provide much-needed relief to millions of middle-class Indians, potentially boosting consumer spending and economic growth.

Simplifying the TDS Framework.

Another crucial recommendation focuses on simplifying the Tax Deducted at Source (TDS) system. The current TDS framework, which has expanded from 4 categories in 1961 to 40 categories of TDS and 13 versions of TCS today, has become increasingly complex and burdensome for businesses and individuals alike.

The GTRI suggests streamlining the TDS structure to just two or three rates. This simplification would significantly ease compliance burdens, reduce administrative costs, and enhance overall efficiency without impacting revenue collection.

Proposed TDS Simplification:

  1. Reduce the number of TDS categories from 40 to 2-3 main categories
  2. Standardize TDS rates across similar types of transactions
  3. Increase thresholds for TDS applicability to reduce compliance burden on small transactions
  4. Leverage digital technologies for more efficient TDS reporting and reconciliation

Additional Tax Reform Proposals

Several other tax reform proposals are being discussed in the lead-up to Budget 2025:

  1. Inflation-indexed deductions: Adjust various tax deductions for inflation, such as:
    • Increasing the Section 80C deduction limit from Rs 1.5 lakh to Rs 2.6 lakh
    • Raising the medical insurance deduction under Section 80D from Rs 25,000 to Rs 41,000
  2. Equalizing tax treatment: Cap the tax on fixed deposit interest at 12.5% for deposits held over 365 days, bringing it in line with long-term capital gains tax on equities.
  3. Supporting key sectors: Extend concessional tax rates for greenfield manufacturing beyond March 2024 and offer a 15% tax rate for Maintenance, Repair, and Overhaul (MRO) firms.
  4. Simplifying customs tariff: Introduce a three-tier customs tariff structure (0%, 5%, and 10%) to attract investments, particularly in electronics manufacturing.
  5. Addressing digital economy taxation: Propose refund mechanisms for the Equalisation Levy and simplified tax return forms for foreign digital service providers.

Latest Studies on Tax Reform Impact.

Recent studies have highlighted the potential benefits of comprehensive tax reforms:

  1. A study by the National Institute of Public Finance and Policy (NIPFP) suggests that raising the income tax exemption limit could lead to a 1.2% increase in GDP growth over the medium term.
  2. Research from the Indian Council for Research on International Economic Relations (ICRIER) indicates that simplifying the TDS system could reduce compliance costs for businesses by up to 30%.
  3. A report by PwC India estimates that aligning tax rates for bank deposits and equities could mobilize an additional Rs 1.5 lakh crore in household savings over the next five years.

Challenges and Considerations.

While the proposed reforms offer significant potential benefits, they also present challenges that policymakers must address:

  1. Revenue Impact: Raising the tax exemption threshold could lead to a short-term reduction in tax collections. The government would need to find alternative revenue sources or implement measures to broaden the tax base.
  2. Implementation Complexities: Simplifying the TDS system would require substantial changes to existing tax laws and administrative procedures. This could pose logistical challenges and require a phased implementation approach.
  3. Balancing Equity and Efficiency: Policymakers must ensure that tax reforms do not disproportionately benefit higher-income groups at the expense of lower-income taxpayers.

Frequently Asked Questions

  1. Q: Why is raising the income tax exemption threshold important?
    A: Raising the threshold adjusts for inflation, maintains the real value of tax exemptions, and provides relief to taxpayers, potentially boosting consumer spending and economic growth.
  2. Q: How would simplifying the TDS system benefit taxpayers and businesses?
    A: A simplified TDS system would reduce compliance burdens, lower administrative costs, and improve overall efficiency in tax collection and reporting.
  3. Q: What impact could these tax reforms have on government revenues?
    A: While there might be a short-term reduction in tax collections, experts believe that increased compliance and economic growth stimulated by these reforms could lead to higher revenues in the medium to long term.
  4. Q: How do India’s tax rates compare to other countries?
    A: India’s tax rates are generally competitive, but the complexity of the tax system and relatively low exemption thresholds are often cited as areas for improvement compared to other emerging economies.
  5. Q: When will the proposed tax reforms be implemented if approved?
    A: If approved in the upcoming Budget 2025, these reforms would likely take effect from the start of the next financial year, April 1, 2025.

As Budget Day approaches, all eyes are on Finance Minister Nirmala Sitharaman to see which of these proposed reforms will make it into the final budget announcement. The potential changes to the income tax exemption threshold and TDS system could mark a significant shift in India’s tax landscape, aiming to create a more equitable, efficient, and growth-oriented tax regime for the world’s fifth-largest economy.

Disclaimer:

This article is for informational purposes only and does not constitute professional tax, legal, or financial advice. The information provided is based on current proposals and discussions surrounding potential tax reforms for the upcoming Budget 2025. Readers are advised to consult with qualified professionals for specific advice tailored to their individual circumstances. The author and publisher do not guarantee the accuracy, completeness, or timeliness of the information presented and are not responsible for any errors or omissions, or for any results obtained from the use of this information.


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Hello, I am C.K. Gupta Founder of Taxgst.in, a seasoned finance professional with a Master of Commerce degree and over 20 years of experience in accounting and finance. My extensive career has been dedicated to mastering the intricacies of financial management, tax consultancy, and strategic planning. Throughout my professional journey, I have honed my skills in financial analysis, tax planning, and compliance, ensuring that all practices adhere to the latest financial regulations. My expertise also extends to auditing, where I focus on maintaining accuracy and integrity in financial reporting. I am passionate about using my knowledge to provide insightful and reliable financial advice, helping businesses optimize their financial strategies and achieve their economic goals. At Taxgst.in, I aim to share valuable insights that assist our readers in navigating the complex world of taxes and finance with ease.

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