Introduction
The new financial year has started, and everyone is busy planning their investments. Amidst the hectic routine, we often forget we need to plan for our taxes as well. Taxpayers need to make informed decisions on the tax implications of their investments, because there are many changes in the income tax structure with the introduction of the new tax regime under Section BAC (1A) of the Finance Act. Under the new scheme, the benefits of the various exemptions and deductions, other than the standard deduction, are not available as in the old regime.
Understanding Current Tax Slabs
The finance minister has clarified that there are no new changes to the income tax rates as of April 1, 2024. Taxpayers can opt either the old or new regime as per their preferences and financial circumstances. They can opt out of the new regime till they file their returns for the assessment year. Individuals without business income can also alternate between the old and new regimes. Further, she also clarified that the new tax regime will be the default income tax regime from the financial year 2023-24 (AY 2024-25). So, if an employee wishes to opt for the old scheme, he must inform his employer at the beginning of the financial year so that the income tax assessment can be done accurately. The income tax rates for the financial year 2024-25 (AY 2025-26) are as follows:
Income tax slab for the financial year 2024-25 (AY 2025-26) under the old tax regime
The income tax rates for individuals, including residents below 60 years of age, non-residents and non-ordinary residents, is as follows:
| Income (INR) | Tax Rate |
| Upto 2,50,000 | Nil |
| 2,50,000 to 5,00,000 | 5% |
| 5,00,001 to 10,00,000 | 20% |
| Above 10,00,000 | 30% |
Income tax slab for the financial year 2024-25 (AY 2025-26) under the old tax regime for Senior Citizens
For senior citizens, the basic exemption limit is Rs 3 lakhs, while for super senior citizens, the basic exemption limit is Rs 5 lakhs.
Income tax slab for the financial year 2024-25 (AY 2025-26) under the new regime
The income tax slabs for the financial year 2024-25 under the new regime are as follows:
| Income (INR) | Tax Rate |
| Up to 3,00,000 | Nil |
| 3,00,001 to 6,00,000 | 5% |
| 6,00,001 to 9,00,000 | 10% |
| 9,00,001 to 12,00,000 | 15% |
| 12,00,001 to 15,00,000 | 20% |
| Above 15,00,000 | 30% |
Rebate eligibility limit in the new tax regime
Standard deductions of Rs.50,000/-for salaried people and Rs.15,000/-for family pensions are available to taxpayers in the new regime.
New tax regime vs old tax regime
The main difference between the old and new tax regimes is the application of exemptions and deductions. Taxpayers can claim many deductions specified under sections 80C, 80D, and 80TTA of the Income Tax Act in the old scheme, which are not available in the new regime.
So, for people with fewer investments, the new regime is beneficial as the tax rates are also lower. But for those who are eligible for tax deductions like HRA, home loan, etc., the old scheme is beneficial. This is an important thing to consider because it can make a substantial difference in the calculation of the tax.
The surcharge for high-net-worth individuals has been reduced. For income above 5 crore rupees, the surcharge has been reduced from 37% to 25%.
Leave encashment exemption limit for non-government employees has been raised from 3 lakh rupees to 25 lakh rupees.
Also Read: Which Is Better: Old Vs. New Tax Regime?
Factors Influencing Tax Slab Changes
Taxes are an important source of revenue for the government. This revenue is used for various developmental projects and administrative expenses needed to run the country. The Indian tax system is one of the world’s largest and most well structured, three-tiered federal structure consisting of the central, state governments, and local municipal bodies. The tax system is used not just to collect revenue, but also promote other objectives like inflation control, employment generation, GDP growth, favorable balance of payments, equitable income distribution, promotion of innovation and entrepreneurship, etc. The central government announces the tax slab rates in the annual budget.
Tax rate changes are necessary for the economic growth of the country. The changes in tax rates are dependent on various factors like inflation, employment, prices, the gross domestic product, and the overall economic growth of the country. India aims to have a just and equitable tax system by adopting a progressive model in which the lower- and middle-income groups have a lower rate of tax and enjoy the benefits of various exemptions and deductions, while higher income groups have a higher rate of tax. This ensures that the tax levied is in proportion to the income earned. The government also tries to meet its social obligations through progressive tax rates.
In the old tax regime, savings were encouraged, so various deductions and exemptions were offered under various sections. To create more housing, exemptions for installments and interest on housing loans were granted. So were education loan exemptions. Natural calamities also affect tax rates. For example, during the COVID pandemic, the government announced a 25% reduction in the rate of tax deducted at source (TDS) for non-salaried payments made to residents to enhance liquidity for the taxpayers. The rate of tax collected (TCS) was also reduced by 25%. For the present year, 2024, the finance minister announced that there is no change in the tax rates or slabs. India being mainly an agricultural economy, a major part of the population depends on agriculture and is in the lower economic strata. Hence, agricultural income has been exempted from tax. Such socioeconomic factors, apart from inflation and GDP, affect tax rates in India.
Also Read: GST Rate Updates 2024 – Goods and Service Tax Rates
Analysis of Previous Tax Slab Changes
India has come a long way since independence as far as tax rates are concerned. From a high of 97.75 percent distributed over 11 slabs to 30% as the highest with three slabs, it has been a progressive journey.
The first tax rate change after independence happened in India in 1949-50, when the then finance minister John Mathai reduced tax on incomes up to Rs.10000/-by a quarter of an anna. From one anna to nine pies in the first slab, and from two annas to one anna to nine pies in the second slab. Anna was the currency unit used at that time in India and is equal to 1/16th of a rupee. There were 64 and 192 paise in a rupee.
- In 1974-75 a significant change in the rate of tax occurred, in which the finance minister reduced the maximum rate from the very high 97.75% to 75%. It was applied to all levels of personal income. The slab was, for income up to 60000/- there was no tax; for income over Rs.70000/-the rate was 70%. The surcharge was reduced to 10% for all categories. So, income tax with a surcharge would amount to 77% of the taxable income as the highest slab and wealth tax were increased.
- The next change was in 1985-86 when there was a restructure of tax slabs. The number of slabs was reduced from eight to four. The highest rate on personal income tax was reduced from 61.875% to 50%. For incomes less than Rs.18000/-there was no tax. For income 18001 to 25000/-was fixed at 25%. The rate of income from 25001 to 50000/-was fixed at 30%. For income from 50001 to 1 lakh, the rate was fixed at 40%, and for income above 1 lakh, it was 50%.
- The next change in rate occurred during the reign of Manmohan Singh. The number of slabs was reduced from four to three. The first rate was 20% for incomes of Rs.30000/- to Rs.50000/-. For incomes Rs.50000/- to Rs. 1 lakh, the tax rate was 30%. The maximum rate was fixed at 40% for incomes greater than Rs. 1 lakh.
- After two years, again, there was a change in the tax slabs. The first slab was Rs.35000/- to Rs.60000/-at 20%; the second slab was fixed at 30% for income from Rs 60,000 to Rs 1.2 lakh; the maximum rate was fixed at 40% for income above Rs 1.2 lakh.
- In 1997-98, finance minister P. Chidambaram presented the ‘dream budget’. In this change, for income of Rs 40,000 to Rs 60,000, the tax was 10%, and for income in the slab of Rs. 60,000 to Rs. 1.5 lakh, it was 20%, and for all income above Rs. 1.5 lakh, the tax was fixed at 30%. The standard deduction was fixed at Rs.20000/-applicable uniformly to all salaried taxpayers. Moreover, employees earning a salary of 75000/-per per year and who were contributing 10% to the provident fund did not have to pay any tax.
- After almost ten years, during 2005-06, again the finance minister, P. Chidambaram, announced considerable changes in the tax system. The exemption limit for tax exemption was increased to Rs. 1 lakh; for income of Rs. 1.5 lakhs to 2.5 lakhs, the tax was fixed at 20%, and for income above Rs. 2.5 lakhs, the tax was fixed at 30%.
- In 2010-11, after five years, finance minister Pranab Mukherjee changed the income tax slabs. As per this change, there was no tax on income up to 1.6 lakhs. For income from 1.6 lakhs to 5 lakhs, tax was 10%, for income of Rs 5 lakh to Rs 8 lakh, tax was 20%, and for income greater than Rs 8 lakh, tax was fixed at 30%.
- In 2012-13, Pranab Mukherjee increased the exemption limit from 1.8 lakh rupees to 2 lakh rupees. For income from 2 lakhs to 5 lakhs, the tax rate was 10%; for income of Rs 5 lakh-Rs10 lakh, the tax rate was 20%, and for income above Rs 10 lakh, the tax rate was 30%.
- In the years 2014-15, the Finance Bill of 2015 abolished wealth tax with effect from the assessment year 2016-17. The then finance minister, Arun Jaitley, replaced the wealth tax with a surcharge of 2% on the super rich who had a taxable income of above 1 crore rupees. So taxpayers did not need to file the wealth tax return from the assessment year 2016-17 onwards.
- The rate was further reduced by finance minister Arun Jaitley in 2017-18 for individuals with income between 2.5 lakh and 5 lakh rupees to 5% from the existing 10%. The rebate under Section 87A of the Income Tax Act, 1961, was reduced to Rs.2500/- from Rs. 5000 for people earning between Rs. 2.5 lakhs and 3.5 lakhs. The combined effect of these changes caused zero tax for those earning up to 3 lakh, and for those earning between 3 lakh to 3.5 lakh rupees, it would be Rs.2500/-
- In the year 2020-21, in an unprecedented move, our finance minister Nirmala Sitharaman introduced the new regime to simplify and lower tax rates. This system was more helpful to new workers who did not have much savings or investment and who would prefer to pay the tax. The rates were much lower, and the process of calculation and filing was simpler. The system continues at present, and the taxpayer can opt either the old or new regimes at the start of the financial year.
Government’s Fiscal Policies
Fiscal policy plays an important role in the development of a country. Fiscal policy basically refers to the government’s use of taxes and debt in public expenditures to influence the overall economy. It is a tool of financial management to achieve specific economic goals. Fiscal policy, along with monetary policy, is used to achieve stability and economic growth in the country.
Objectives of the fiscal policies in India
The main objectives of an effective fiscal policy for a country are:
- Price stability and economic growth
- Mobilize additional resources for social development projects
- Maintain stability in the balance of payments
- To raise the standard of living of people in the county
- Reduce inequalities in income and wealth
- Health growth in private sector with incentives for innovation
- Create employment opportunities for the citizens
- Improve external trade and payments
- Infrastructure development in critical areas like transportation
- Energy, technology and telecommunications
- Environmental sustainability
Tools of fiscal policy in India
The major tools of fiscal policy in India are taxation, public borrowing, public expenditure and other measures.
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Taxation
By increasing and decreasing taxes, the government can influence economic activity. For example, when taxes are reduced, individuals and businesses have more money to spend and invest. This can boost economic growth. On the other hand, in an over expanding, unsustainable economy, by increasing the taxes, liquidity can be controlled.
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Public borrowing
The government resorts to borrowing in the form of bonds, NSCs, Kisan Vikas Patra, etc., when the expenditures exceed the revenues. The government tries to raise money from the domestic as well as international population to fund infrastructure projects, welfare programs, and other public services.
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Public expenditure
This includes subsidies, transfer payments, welfare programs, public services and salaries to government employees. By increasing or decreasing its spending the government can directly influence the economy of the country. For example, more government spending can generate employment and higher productivity.
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Other measures
The other fiscal measures the government usually adopts are
- Rationing and price control
- Wage regulation
- Improvement in production of goods and services
The fiscal policy path adopted by India for growth and sustainability has been to focus on infrastructure development with increased allocation to important sectors like transportation, energy, and urban development.
Expert opinions on potential changes
The main problems in India’s tax system are tax evasion, complex regulations, high tax rates, and insufficient monitoring and enforcement. An effective tax system is one that promotes economic interests and prosperity in its citizens. Though there are several opinions and changes suggested by experts, the basic characteristics of a good tax system are:
- Fairness
- Transparency
- Simplicity
- Ease of administration
Some experts are of the opinion that the income tax laws applicable to individuals in India is regressive and unjust. That is because its individual income tax base consists of mainly salaried people. A large section of the population is outside the income tax net, like individual service providers, rich landowners enjoying the benefits of agricultural income exemptions, income not shown as income, etc. They are of the opinion that a small percentage of the population bears the impact while others escape. There is tax evasion, non-disclosure of income, and tax leakage. The government needs to create a more just, equitable, and widespread tax regime and bring in all those outside the tax net, not just put the burden on individuals in the salaried class.
On the positive side, there are also expert opinions that the government is consistently and untiringly working on the rationalization of policies, public debt management, and other fiscal and monetary measures to improve tax compliance and increase the tax base in the country.
In tax reforms, implementation of the goods and services tax has been a major milestone for improving revenue, eliminating tax evasion, and streamlining the indirect tax system in the country that the government has. Countercyclical fiscal policies have been employed to address economic downturns. On the whole, India has adopted a dynamic approach by balancing changing economic conditions and its critical priorities.
Potential Areas of Taxation Reforms
Taxation serves as a tool for promoting economic growth, reducing inequality, and enhancing sustainability. Major tax reforms are on the agenda for India. The government has started many schemes, like the Startup India Action Plan to nurture innovation, tax benefits to the special economic zones (SEZs) to improve exports, investment, and job creation. The goods and services tax (GST) has simplified and streamlined the indirect tax system, Digitization has increased transparency and improved compliance. Environmental sustainability is another aspect of India’s tax strategy, with incentives for eco-friendly practices.
The introduction of faceless assessment and appeals is an important reform in the taxation system, promoting speedy and transparent tax assessments without the need for human interaction. Demonetization, the Benami Property Transaction Act, and the Black Money Act are introduced to curb black money and illegal activities and introduce a fair tax system.
The introduction of the new tax regime with considerably lower rates of tax and easier calculations due to lower deductions and exemptions is aimed at simplifying compliance and improving participation. The exemption of foreign companies that have no physical presence in India from the minimum alternate tax (MAT) is a significant step to attract foreign investment in India.
Potential areas of taxation reform for India are enhancing tax dispute resolution, using alternate dispute resolution methods like negotiation and mediation. Creating effective tax reform committees to simplify laws, boost taxpayers’ confidence, attract foreign investment, reduce tax evasion, and ensure global competitiveness. India also needs to stay updated on global tax trends. It needs to simplify and streamline taxation processes by adopting technology, create awareness in the people and ensure a fair and equitable tax system in the country.
Also Read: Impact Of GST: Invoice, Simplified Tax System And Reduce Compliance Burden
Public Sentiment and Feedback
The optimal tax theory and best practices from an Oxford study shows that tax reforms should aim to broaden the tax base, reduce tax rates, and reduce rate differences, for an effective tax system, in India. The study states that a simple, transparent, and fair tax system is needed for our country. The objective must be to increase revenues by minimizing the costs of collection, compliance, and distortions. The exemption from agricultural incomes narrows the base and opens avenues for tax evasion. Wilful evasions by multinationals with headquarters in tax havens are another major source of revenue loss. Tax administration systems must be improved to deal with complicated business systems.
In general, the public sentiment is that the government tends to tax sectors where it can raise revenue easily, while issues like difficulty in taxing unorganized sectors, tax evasion by multinational companies through their profit shifting, rationalization of subsidies, and stricter enforcement have not been addressed. This is the reason for the low tax base in India.
Conclusion
An effective tax planning strategy involves understanding the current tax slabs and the latest rules and regulations pertaining to them. Taxpayers must plan an effective tax strategy that can help them optimize their taxes and stay compliant.
The economic growth and development of a country depend mainly on its tax system. The responsibilities of a robust tax system apply both to taxpayers and to tax authorities. The government must establish a fair, simple, transparent, and adequate tax system in the country. Fiscal and monetary policies also play an important role in this. The citizens, on their part, must comply with the rules and regulations and be honest and transparent in their tax payments and return filing. Both should work together to create a progressive and effective tax system.
Frequently asked questions
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Can I change from the old regime to the new income tax regime?
Answer: You can switch between the old and new income tax regimes while filing the income tax returns, for a particular financial year.
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What is the basic difference between the old and new income tax regimes?
Answer: The old income tax regime offers various deductions and exemptions but with higher tax rates, while the new regime allows lower tax rates with fewer deductions.
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What happens if I do not choose the tax regime?
Answer: If you do not choose the tax regime, the taxes will be computed automatically as per the new regime.
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What is Form 10 IE?
Answer: Form 10 IE must be submitted by individuals and HUFs with business or professional income while filing the income tax return, depending on the tax regime.
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Is the standard deduction available in the new income tax regime?
Answer: Yes, the standard deduction of Rs.50,000/- from the total income of salaried individuals, is available under the new tax regime.
