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The upcoming Union Budget 2025 in India is generating considerable anticipation, particularly regarding potential changes to the income tax structure. A prevalent sentiment among taxpayers and commentators is the need to alleviate the financial burden on the middle class. This is fueled by rising living costs and a desire to stimulate consumer spending, a key driver of economic growth. Proposals for significant tax relief, focused on adjusting income tax slabs, are central to these discussions. BankBazaar CEO Adhil Shetty's recommendations provide a concrete example of the proposed reforms, outlining a three-pronged approach designed to address the issues at hand. His core argument revolves around the need to account for inflation, improve fairness across different income levels, and promote savings through strategic deductions.
Shetty's first key proposal centers on adjusting the highest income tax slab. Currently, the 30% tax bracket begins above Rs 15 lakh, a figure unchanged since 2020. However, the Cost Inflation Index (CII) has risen by 21% in this period, highlighting the erosion of purchasing power. To counter this, Shetty suggests raising the threshold for the 30% slab to Rs 18 lakh. This adjustment, he argues, would provide considerable relief to urban salaried individuals, whose expenses have been significantly impacted by inflation. The projected savings range from Rs 1300 per month for those earning Rs 8 lakh annually to Rs 7800 per month for those earning Rs 18 lakh or more. This relief is not simply about higher earners benefitting; it directly addresses the impact of inflation on middle-class households who previously would be subjected to the highest bracket at a lower income threshold.
Shetty's second recommendation tackles the broader issue of tax bracket fairness. He explicitly disagrees with solely increasing the tax-free income limit (often suggested to be raised to Rs 10 lakh). He highlights that such a measure would disproportionately shift the tax burden to higher earners, failing to address the needs of the middle class effectively. Instead, he advocates for a comprehensive restructuring of tax brackets, ensuring a more equitable distribution of the tax burden. His argument is supported by data indicating that in the assessment year 2023-24, only 2% of taxpayers were responsible for 77% of the total income tax revenue, revealing a significant imbalance in the current system. A balanced reform, according to Shetty, requires adjustments to all tax brackets to ensure that the tax system reflects the economic realities of all income levels. This approach would move beyond simple increases to the tax-free amount, creating a more sustainable and just tax environment.
The third pillar of Shetty's recommendations focuses on incentivizing savings and financial planning. He proposes a 30% flat deduction on gross income, capped at Rs 15 lakh. This deduction aims to counteract the negative consequences of the new tax regime's lack of deductions, which has been linked to a decline in various savings instruments, including life insurance, Equity Linked Savings Schemes (ELSS), and overall household savings. The argument is that simpler, more easily accessible deductions would encourage individuals to invest in their long-term financial security. This would not only benefit individuals but also contribute to increased household savings and economic stability. Specifically, he argues it would incentivize participation in insurance plans, the National Pension System (NPS), and other small savings schemes. By making these savings options more attractive through tax benefits, the government can positively influence national savings rates and long-term financial planning.
The article contrasts the proposed reforms with the existing tax regimes—both the new and old tax regimes—providing a clearer picture of the potential impact of the proposed changes. The data presented on current tax slabs allows the reader to understand the magnitude of the proposed changes and their potential effect on different income groups. The proposed adjustments aim to mitigate the negative effects of inflation on middle-class incomes while creating a fairer and more equitable system promoting savings for the future. Whether the proposed recommendations are fully implemented in Budget 2025 remains to be seen, but they have undoubtedly added crucial fuel to the ongoing national conversation around tax reform in India.