The tax slabs you can expect in Nirmala Sitharaman’s second budget

Date : 27/01/2020
Read: 5 mins

In these times of slowdown, it is hoped that the forthcoming budget will propose personal tax cuts to boost demand.

The tax slabs you can expect in Nirmala Sitharaman’s second budget

Finance Minister Nirmala Sitharaman flagged off the pre-budgetary exercise with a meeting of the Finance Ministry’s budget division on October 14. According to media reports, the main focus of the Union Budget 2020–21 will be on giving as much leg-up to economic growth as possible.

There are some small signs that fuelled such speculation. For instance, in a first, the Finance Ministry sought suggestions for changes in tax rates for individual people and companies.

In November 2019, Sitharaman’s ministry had put out a circular asking for suggestions relating to tax rates and duty structures from the industry and trade associations, kindling hopes of some tax relief for the corporate sector. If this happens, it will be on the back of corporate tax rate cuts that were announced for new and domestic manufacturing companies in September.

However, apart from tax relief for companies, it is also being speculated that Budget 2020–21 would have something for the middle class consumer as well – in the form of personal income tax cuts. This is no idle speculation; in a tweet, Sitharaman herself sought suggestions from the common people for her budget.

In December 2019, at the Hindustan Times Leadership Summit, Sitharaman said that a cut in personal income tax was “one among the many things we’re looking at”. This is something industry bodies also want; according to them, raising tax exemptions for individual taxpayers from Rs 2.5 lakh to Rs 5 lakh would boost demand in the current phase of slowdown.

July revisions

Before we make forward-looking statements on Sitharaman’s forthcoming budget, let us take a brief look at her maiden budget presented last July. It was the Modi government’s first after the elections, and there were hopes of reductions in personal tax rates.

However, Sitharaman disappointed in this regard, probably because the interim budget last February, three months before the polls, had already announced a few concessions for the middle class.

On the other hand, Sitharaman had a surprise in the form of additional surcharges for HNIs with incomes exceeding Rs 2 crore. So, for HNIs with incomes in the range of Rs 2–5 crore, the surcharge was increased from 15% to 25%, and the effective tax rate increased from 35.88% to 39%.

For those earning more than Rs 5 crore, the surcharge was raised from 15% to 37%. For this group, the effective tax rate rose to almost 43%.

But it would be unfair to say the Finance Minister had bypassed the middle-class altogether; help came via sops for affordable housing.

Sitharaman proposed a deduction of Rs 1.5 lakh towards housing loan interest payment, provided the loan was sanctioned in the 12 months between April 1, 2019, and March 31, 2020. This was in addition to the existing deduction of Rs 2 lakh available as interest on self-occupied house property.

She laid down two more conditions: first, the stamp duty value of the property in question had to be below Rs 45 lakh, and secondly, the claimant could not own any residential property on the date of sanction of the loan.

Expectations for 2020

If media reports are to be believed, the finance minister could announce a lowering of the tax rate, most likely through some changes in the tax slab.

According to these reports, the committee set up to review direct taxes has retained the basic exemption levels for various groups: nil for incomes up to Rs 2.5 lakh for general income tax payers, up to Rs 3 lakh for senior citizens above 60 years, and up to Rs 5 lakh for those above 80 years.

The panel has not suggested any change to the current income tax exemption limit for other slabs:

5% for income between Rs 2.5 and Rs 5 lakh
20% for Rs 5–10 lakh
30% for incomes exceeding Rs 10 lakh

The change will be in widening the income tax slabs; the committee has recommended the following:

10% personal income tax rate for those with annual incomes up to Rs 10 lakh
20% for incomes in the Rs 10–20 lakh range
30% for incomes between Rs 20 lakh and Rs 2 crore
35% for incomes exceeding Rs 2 crore

Additionally, media reports say that the task force has also suggested that the surcharge on incomes at the upper limit be removed – the same surcharges that Sitharaman had imposed in her maiden budget.

Last words

As D-Day approaches, it is perhaps reasonable to expect personal tax cuts, especially given that the Finance Minister herself has hinted about it. If this happens, it would indeed be a welcome step and good news for low- and middle-income groups and salaried people.

Moreover, this would put extra cash in the hands of the people, which will have a domino effect in pushing demand for goods and services. Also, if those with annual incomes up to Rs 10 lakh are brought under a flat 10% tax rate, it would make cash for spending available to a larger chunk of taxpayers.

According to the Central Board of Direct Taxes (CBDT), over 27% of the 5.52 crore individual taxpayers who filed returns in 2017–18 had incomes between Rs 5 lakh and Rs 10 lakh. So, if recommendations of the task force are implemented, these 1.47 crore taxpayers would move from the 20% slab to the 10% slab.

Such a move could well inject fresh life into ailing sectors such as the automobile industry, real estate, telecom, and aviation, and play a significant role in making the government’s goal of a $5 trillion economy come true.

Have a look at Budget 2019 and what it meant for taxpayers.