Budget 2025: How taxpayers with more than Rs 19 lakh income are paying extra tax

Budget 2025: How taxpayers with more than Rs 19 lakh income are paying extra tax

Taxpayers and experts are anticipating that the upcoming budget will include a comprehensive revamp of the income tax system, with some speculations suggesting a rewrite of the Income-tax Act of 1961.

More and more taxpayers are shifting towards the new tax regime with 72% of taxpayers now prefer it.

The Union Budget for 2025-26 has been finalised by the Centre as the traditional Halwa ceremony was held on 24th January '25.. Among various expectations and demands, one key request from the growing middle class of India remain unmet - a reduction in income tax rates. 

It is anticipated that the upcoming budget will include a comprehensive revamp of the income tax system, with some speculations suggesting a rewrite of the Income-tax Act of 1961. The shift towards the new tax regime introduced in 2020-21 is gaining momentum, as 72% of taxpayers now prefer it. Further tax cuts in 2024 are likely to encourage more taxpayers to embrace this new system.

New Tax Regime after Union Budget 2024

The New Tax Regime provides a higher threshold for tax-free income, reduces the number of deductions, and simplifies the filing process. With minimal deductions and exemptions available, taxpayers are relieved from the burdensome task of providing proof for their claims. The tax-free income threshold now stands at Rs 7.75 lakh. 

Analysing the data from the Income Tax Department for the assessment year 2023-24, it is evident that 70% of tax filers reported a taxable income of Rs 5 lakh or lower, resulting in no tax liability. Additionally, 88 percent of filers fall below the Rs 10 lakh mark, while 94 percent remain under Rs 15 lakh.

As per the analysis, we can say that 9 in 10 taxpayers are either in a no-tax or a low-tax bracket. Most of them will choose the new regime. 

 FM Nirmala Sitharaman should consider three cases: 

1. Enhance the 30% slab to Rs 18 lakh

The new regime, implemented in 2020, has seen the Cost Inflation Index (CII) rise by 20.59%. While most brackets under the new regime have been increased by at least 20%, one exception remains - the 30% slab, which remains stuck at the initial Rs 15 lakh level. Updating this bracket by 20% would bring it to Rs 18 lakh, preventing taxpayers with higher incomes from bearing a disproportionate burden of taxes. This issue will be further discussed in the following point.

For urban salaried individuals, dealing with high-interest EMIs, school expenses, and the financial support of dependent family members, an above-average income may not provide much relief due to the rising costs of healthcare, education, and living expenses. It is crucial for such taxpayers to receive some form of relief.

2. Tax brackets

There are suggestions to raise the tax-free income threshold from Rs 7.75 lakh to Rs 10 lakh. While providing tax-free income has its advantages, it comes at the expense of taxpayers in higher income brackets who have not seen adjustments for inflation in over five years. In the assessment year 2023-24, the bottom 98% of taxpayers only contributed 23% of total tax payments, highlighting an uneven distribution of the tax burden. The issue lies not in the fact that 2% of taxpayers contribute 77% of taxes, but rather that this 2% comprises only 1.3 million individuals. Shockingly, just 91,000 filers, representing the top 0.1% with incomes exceeding Rs 1 crore, contributed 58% of total income tax collections.

Out of the total number of filers, only 91,000 individuals, representing the top 0.1 percent with incomes above Rs 1 crore, were responsible for 58% of income tax collections. The concentration of tax contributions among this group highlights the significant impact they have on overall tax revenue.

Increasing the tax-free income threshold without adjusting tax brackets can result in a disproportionate burden on individuals with higher incomes. Our analysis indicates that individuals earning more than Rs 19 lakh are currently paying excess taxes, which is calculated as the difference between inflation-adjusted taxes and actual taxes paid. For example, based on the Consumer Price Index, a taxpayer with a taxable income of Rs 25 lakh is now paying Rs 37,200 per year in excess taxes.

3. A 30% deduction

The new regime has brought about a significant benefit by eliminating deductions and exemptions. However, after five years, some concerning trends are beginning to surface. There has been a decrease in the reach of life insurance and a decline in investments in ELSS (equity linked savings schemes) despite favorable equity market conditions.

According to BankBazaar, fewer salaried individuals show interest in small savings schemes, and there is a lack of enthusiasm for NPS (National Pension System). Without tax deductions, the interest in essential protections and long-term savings is waning.

Amidst an economic slowdown, diminishing household savings, and stagnant incomes, households are increasingly relying on credit for consumption, leading to growing delinquencies. In such circumstances, the lack of savings and protections can pose significant risks to households.

Historically, tax deductions have typically been associated with insurance and savings, with the lack of one potentially negatively impacting the other. Although the initial regulations under the new regime did not include any deductions, a few have since been introduced. However, there is a need for additional deductions to be implemented.

To streamline the process, it is recommended that a flat deduction of 30% of the gross income be established to cover long-term savings, essential insurance, healthcare and education expenses, as well as loan repayments, without complicated caps and sub-limits. To ensure fairness across various income levels, the deduction could be capped at Rs 15 lakh.