A sigh of relief for middle class as tax deduction may see a significant jump

The new budget may come with few changes, one of which is the tax deduction limit is likely to increase to 3 lakh

A sigh of relief for middle class as tax deduction may see a significant jump


The upcoming 2018-19 Budget - which will also be the last regular budget for the NDA government - is expected to provide tax relief to the middle class. While nothing has been decided yet, recent reports reveal that the Finance Ministry is contemplating an increase in the personal tax exemption limit, and may amend current tax slabs.

What are the other proposals to look out for?

The Finance Ministry is considering a proposal to make changes to the tax slabs, to reduce the burden on taxpayers. The move is aimed at providing some relief to middle-income families, whose finances have taken a harder hit due to rising inflation rates.

Last year's budget offered little respite to a majority of taxpayers, as no changes were made to the tax slabs, and most taxpayers received only marginal relief. For instance, individuals earning an annual income ranging from Rs. 2.5 lakh to Rs. 5 lakh, saw a reduced tax rate from 10% to 5%.



The current income tax rate for 2017-18 is mentioned below: 

Income Tax rate
Up to Rs. 2,50,000 -
Rs. 2.5 lakh -Rs. 5 lakh 10%
Rs. 5 lakh - Rs. 10 lakh 20%
Above Rs. 10 lakh 30%

The proposal for the 2018-19 budget, which is to be unveiled on 1 February, has the following recommendations: 

Income Tax rate
Rs. 5 lakh – Rs. 10 lakh 10%
Rs. 10 lakh – Rs. 20 lakh 20%
Above Rs. 20 lakh 30%

What the pre-budget memorandum set by chamber CII (Confederation of Indian Industry) says

Taking into account rising inflation rates and the cost of living, it has been suggested that the basic limit for exemption and other income slabs should be improved to offer more benefits to low-income groups. It also points out that the income trigger for peak rate in other countries is much higher. While there is no certainty that these changes will be implemented in the upcoming budget, the proposals do seem to be in favour of the middle-income group. 

Related: Things you didn't know about tax savings [Infographic]

While the actual proposals put forth by the industry chambers is that they want the government to bring down the highest slab to 25%, due to the pressure on fiscal deficit, the ministry is unlikely to agree on the same. Since rolling out GST from July 1, 2017, the pressure on the fiscal deficit has been pegged at 3.2% of the GDP for 2017-18. The government has raised the borrowing target by Rs. 50,000 crores to meet the fiscal shortfall.

Related: How is taxable income calculated?

However, the government expects GST collections to pick up in the next fiscal as there are hopes that the teething problems of the new tax regime will be resolved.

How does it impact consumers?
If the tax deduction limit is increased, it will ultimately reduce the burden of tax and eventually it will increase the disposable income of consumers.
Tax exemption on bank fixed deposits and mutual funds will encourage households to save more. This would, in turn, increase the deposits in banks which can be used to extend loans.

Related: Components of your salary and their tax benefits [Infographic]


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