The upcoming Budget may put more money in people’s pockets as the Modi Government is considering raising the income tax limit and tinkering with the existing tax slabs.

Indications are that the exemption limit will be raised to ₹5 lakh from the current ₹2 lakh; meaning, people earning ₹5 lakh or less annually will not have to pay tax.

Currently, tax is levied at the rate of 10 per cent on income of ₹2-5 lakh, 20 per cent on income of ₹5-10 lakh and 30 per cent on income above ₹10 lakh (see table) .

Education cess

Further, there is an education cess and an additional surcharge at the rate of 10 per cent on income exceeding ₹1 crore.

The previous Government had rejected the suggestion of the last Standing Committee on Finance, headed by senior BJP leader Yashwant Sinha, that the I-T exemption ceiling be raised to ₹3 lakh.

The panel had recommended nil tax for income up to ₹3 lakh, 10 per cent for income of ₹3-10 lakh, 20 per cent for ₹10-20 lakh and 30 per cent for income beyond ₹20 lakh.

However, the Ministry had said that the total revenue loss on account of the changes and removal of cess would work out to around ₹60,000 crore.

Pros and cons

The argument in favour of changing the structure is that it would put more money in the hands of people and, in turn, raise demand for various goods and services, boosting the manufacturing and services sectors.

At the same time, more consumption would also result in higher collection of indirect taxes, which would compensate the fall in income-tax collection.

While some feel that more money in the hands of people will also help them combat inflation, economists believe that more money in circulation may actually fuel inflation.

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