To start with, the annual general budget presented by the Finance minister, Ms. Nirmala Sitharaman, puts more disposable income in the Indian households’ hands.
This is the first annual budget in the BJP’s third term, since it formed the government in the center, this June.
The finance minister while presenting her 7th straight annual budget proposed an increase in standard deduction from 50 to 75 thousand for salaried individuals, and another significant proposal is to widen the 5% tax slab from 3 to 7 lakhs from the previous 3 to 6 lakhs, under the new regime of Indian Income tax Act. One must note that a significant 60% plus tax payers have now been migrated to the new regime.
These proposals are seemingly intended to increase the disposable income of the lower-and middle-income Indian households.
Until FY23-24, the standard deduction, which is the amount deducted from the salary and not subjected to tax, stood at 50 thousand per annum. This has been increased to 75 thousand, effective the current financial year, FY24-25. What this means to the Indian salaried individual, is that 75 thousand rupees is deducted from the total income, and is not subjected to tax. This is a direct saving to the salaried individual.
The proposal to widen the 5% tax slab from 3 to 7 lakhs also is done with the intent to increase the disposable income, which then will presumably be spent on consumption. Until now, Income earners upto 3 lakh per annum were exempted from tax and further a tax of 5% was levied on an income from 3 and upto 6 lakhs. The next slab was of 6 to 9 lakhs with 10% tax rate. However, under the new tax structure the 5% tax slab is now widened from 3 to 7 lakhs. Therefore, the incremental 4 lakhs (3 to 7 lakhs) is also now taxed at 5%.
Effectively, for the lower- and middle-income households, these changes in the tax structure will save the tax payer an amount of 17,500 /- per annum.
There are 8 crore tax payers in India out of which 50 percent do not pay any tax as they earn less than 3 lakhs per annum. Under the new tax structure, that percentage is expected to increase to 60 percent which means about 6 crore tax payers will pay zero tax, as they fall well below the minimum income level required to pay Income Tax.
While this is a revenue loss to the government to an extent of 25 thousand crores, it also means that this money will come into the Indian domestic market in the form of spending by households, who are the direct beneficiaries of the new tax structure.
Needless to say, the spending will have an upward multiplier effect on the Indian economy which is poised to be 5 trillion-dollar economy by 2026.