NEW DELHI: The government recently claimed that Income tax burden on the common man has come down in the last 10 years, thanks to the Narendra Modi-led government’s various measures. It claimed that taxpayers in the Rs 2.5-7 lakh tax bracket who paid on an average Rs 25,000 (R43,000 after adjusting for inflation) in FY14 are now paying zero tax. Even those in the Rs 7-10 lakh income category, the average tax they paid in FY24 was only Rs 43,000.
Has the tax burden on the middle class indeed come down? Let us do a reality check on the government claims.
A historical context
To understand the impact of these changes, let’s take a look at the income tax scenario from FY 2013-14 to FY 2024-25. In FY 2013-14, an individual earning Rs 250,000 was not liable to pay any tax after considering available rebates. Fast forward to FY 2024-25, and the basic exemption limit under the Old Tax Regime stands at Rs 500,000. This shift illustrates the government’s recognition of rising living costs and its attempt to alleviate some of the financial burdens on taxpayers.
The introduction of the New Tax Regime has been a game-changer, particularly for those with incomes up to Rs 7,00,000, who do not pay any tax. For salaried employees, this threshold rises to Rs 750,000, marking a significant step towards making tax compliance easier. However, while the New Tax Regime has simplified tax calculations, it is essential to understand that the benefits may not be as substantial as they seem when adjusted for inflation.
Analysing the numbers
Let’s delve deeper into the numbers. In FY 2013-14, individuals earning Rs 700,000 paid a tax of Rs 70,000, and those with an income of Rs 15,00,000 faced a tax liability of Rs 280,000.
In stark contrast, by FY2024-25, taxpayers earning Rs 700,000 are exempt from tax, while those earning Rs 15,00,000 pay only Rs 140,000.
This significant reduction in tax liability highlights the government’s intention to provide relief to taxpayers. However, one must consider the inflationary impact of these changes, as explained by Chetan Daga, founder of AdvantEdge Consulting.
Assuming an annual inflation rate of 8%, the Rs 250,000 threshold from FY 2013-14 would equate to approximately Rs 513,000 in FY 2024-25.
While the government has increased the non-taxable income limit to R500,000, this change essentially aligns with inflation rather than providing genuine tax relief, according to Daga.
The reality of Inflation
“If we change the assumption of inflation rate from 8% to 11% per annum, Rs 250,000 in FY 2013-14 nearly becomes Rs 700,000 in FY 2024-25.
As such, the increases in basic exemption limit and corresponding tax reliefs appear largely inflationary in nature, and not in the nature of extra concessions given by the government,” illustrates Daga. He adds, though the New Tax Regime has certainly eased the compliance burden for the taxpayers, but has not granted significant tax savings in the real sense, after adjusting the effect of inflation.
According to Pune-based tax expert, Pritam Mahure, “When we look at these numbers in isolation, it may appear that tax liabilities have decreased. However, inflation has eroded much more than the stated tax savings of around R25,000. Therefore, these figures should not be considered in silos but rather in comparison to the overall economic landscape. As the world becomes increasingly fluid, many high-income individuals are contemplating leaving the country due to the burden of direct taxes.”
Meanwhile, Vivek Jalan, partner with Tax Connect Advisory Services pointed that on an income of Rs 7 lakh, an individual had to pay Income Tax of Rs 29,000 approximately in FY14-15 after a deduction towards investment and Mediclaim. It is a fact that today under the new tax regime, they have to pay NIL on the same level of Income.
“However, considering the Cost of Inflation of approx. 6% pa, the present value of Rs 7 lakh income of FY14-15 is Rs 12.50 lakh today and on which the tax is Rs 90,000 in the new regime in FY24-25. Hence, the government should consider easing out the tax rate in the new regime and make it the only regime as the Income Tax Act goes for a comprehensive review on 1 Feb 2025,” stated Jalan.
While the changes in tax regulations have undoubtedly eased compliance burdens, the real savings for taxpayers may not be as significant as they seem when considering inflation. It is crucial for individuals to remain proactive in managing their personal finances by understanding how these changes affect their tax liabilities.