The Budget should raise the income tax exemption threshold to Rs 5.7 lakh to match inflation, simplify the TDS system, and equalise tax treatment for bank deposits and equities, think tank GTRI suggested on Monday. The threshold for an individual’s income tax liability has remained unchanged at Rs 2.5 lakh since 2014. Adjusted for an annual inflation rate of 5.7 per cent, Rs 2.5 lakh in 2014 is equivalent to just Rs 1.4 lakh today.
To maintain the same real value, the threshold under the old regime of individual taxation should reasonably have been Rs 5.7 lakh. This adjustment is necessary to ensure that tax levels remain consistent with 2014 standards, GTRI said.
It said the minimum wage for a skilled worker in Delhi is Rs 21,917 per month or Rs 2.63 lakh per annum. Many lower-income professionals, such as drivers or multi-tasking staff, could be spared of tax return filing.
The Union Budget 2025 offers a chance to calibrate India’s current direct tax system to match current economic needs, including responding to the stress on middle-income taxpayers, said a report jointly prepared by JB Mohapatra, former Chairman, Central Board of Direct Taxes (CBDT) and GTRI founder Ajay Srivastava.
The Global Trade Research Initiative (GTRI) also suggested raising fixed deductions and exemptions.
The new tax regime exempts income up to Rs 3 lakh. Those earning annually between Rs 3-7 lakh pay 5 per cent tax, Rs 7-10 lakh (10 per cent), Rs 10-12 lakh (15 per cent), Rs 12-15 lakh (20 per cent) and above Rs 15 lakh (30 per cent).
The old tax regime, however, exempts income up to Rs 2.5 lakh from taxes. Income from Rs 2.5-5 lakh attracts 5 per cent tax, and 20 per cent for income between Rs 5 lakh and Rs 10 lakh. A 30 per cent tax is levied on income above Rs 10 lakh.
GTRI said inflation-indexed tax slabs and exemptions would ensure that the real value of these benefits remains constant, protecting the purchasing power of taxpayers.
Many countries already provide automatic inflation indexing for tax slabs, threshold taxability, and deductions, serving as a global benchmark for India to emulate.
GTRI also suggested simplifying the TDS system. Tax Deducted at Source (TDS) was introduced in 1961 with four categories: salaries, interest on securities, dividends, and payments to contractors.
Over time, it has expanded to 40 categories of TDS and 13 versions of TCS. Despite this expansion, most TDS revenue comes from a limited number of sources, such as salaries, dividends, contracts, professional services, rent, and payments to non-residents.
The current TDS framework complicates compliance due to varying rates and thresholds.
“The government could consider removing TDS for less significant categories. With digitisation and interconnected government databases ensuring compliance, simplifying TDS rules would ease business operations and enhance efficiency without impacting revenue collection,” GTRI said.
GTRI also said there is a disparity in taxation of bank deposits and capital market gains.
Long-term capital gains from equities held for one year are taxed at 12.5 per cent, while interest from fixed deposits (FDs) is taxed at individual slab rates, reaching up to 30 per cent.
This tax disparity encourages households to favour equity investments over FDs. To address this imbalance, the tax on FD interest earned from deposits held for over 365 days should be capped at 12.5 per cent for individual taxpayers with reasonable conditions attached to the legislative move.
Such an approach would level the playing field between bank deposits and stock market investments, encouraging greater household savings in FDs.
“Inflation is a major worry for everyone. We suggest raising tax exemptions to match inflation, reclassifying F&O as speculative activity, and equalising tax treatment for bank deposits and equities. These reforms will create a fairer tax system, encourage savings, and support economic growth,” GTRI Founder, Ajay Srivastava said.
Source #ET
