As we approach Budget 2024, taxpayers eagerly anticipate potential changes to income tax slabs. The current tax regime has remained largely unchanged since 2013, and it’s time to assess whether it adequately reflects the rising cost of living and inflation. Let’s delve into the details and understand why you might be paying excess tax.
The Old Tax Regime
Under the old tax regime, income tax slab rates have not been adjusted for inflation. As a result, taxpayers continue to pay higher tax rates despite the changing economic landscape. Consider this: the value of every ₹1 earned in 2012-13 has effectively decreased to ₹0.55 in 2024-25. In other words, an income of ₹10 lakh in 2012-13 now has the purchasing power of only ₹5.50 lakh, while ₹20 lakh is equivalent to ₹11 lakh in terms of buying capacity.
The Impact of Inflation
Bankbazaar’s analysis highlights the importance of inflation-adjusted tax brackets. When inflation isn’t factored in, taxpayers end up paying more than they should. Let’s break it down:
- Excess Taxes Paid: For an income of ₹10 lakh, excess taxes paid in the old regime amount to ₹43,226 (approximately ₹3,602 per month). At ₹20 lakh, the excess taxes paid increased to ₹1.84 lakh in the old regime and ₹67,978 in the new regime.
- Effective Tax Rates: The old regime results in a tax liability of ₹1.17 lakh, translating to an effective tax rate of 11.7%. In contrast, the new tax regime’s liability stands at ₹62,400 (6.24%).
- Inflation Adjustment: Adjusting the 2013-14 tax (₹1.33 lakh) for inflation, it should have been reduced to ₹73,774 (7.3%). Taking inflation into account, ₹10 lakh in 2013 is equivalent to ₹5.5 lakh in 2024. Consequently, the ‘real’ tax rate under the old regime is 21%, while it’s 11.3% under the new regime.
The New Tax Regime
The new regime appears more favorable in terms of inflation adjustment, but there’s a catch. Its positive impact is limited to incomes up to ₹15 lakh. Beyond that, there’s no inflation adjustment. In comparison, the old regime fails to offer inflation adjustment for any income above ₹5 lakh.
- Tax Slabs: Rationalize tax slabs for both old and new regimes. For instance, consider taxing income between ₹5 lakh and ₹10 lakh at 10%, between ₹10 lakh and ₹20 lakh at 20%, and income above ₹20 lakh at 25%.
- Simplification: Simplify the tax structure further by expanding deductions or credits available to taxpayers. This could promote savings and align with broader economic goals.
Conclusion
Budget 2024 presents an opportunity to address these issues and create a fairer tax system. Stay informed and watch out for updates as the budget unfolds! Remember, these are expectations, and the actual budget may bring surprises. Keep an eye out for Finance Minister Nirmala Sitharaman’s announcements on July 23.
