Budget 2021: Middle class likely to gain from higher tax deductions

Photo for representational purpose

Middle class tax payers may get a lot to cheer about the Budget proposals to be presented by Finance Minister Nirmala Sitharaman next month.

Sources said that the Budget 2020-21 may take the sops announced earlier under the Atmanirbhar Bharat package to help people in their fight against the Covid-19 pandemic further, by raising the basic tax exemption limit for an individual income tax payee to Rs 5 lakh from Rs 2.50 lakh at present to enhance net disposable income in their hands.

In the interim budget of 2019, the government had proposed a rebate on all payable taxes if an individual's taxable income is upto Rs 5 lakh per annum. But it kept the basic exemption levels unchanged.

Even last year, the basic exemption limit remain unchanged even though the government provided some relief to taxpayers by allowing them to choose between the existing tax regime and an alternative optional new tax regime with lower rates sans exemptions.

While the proposal to raise the basic tax exemption limit for individuals has come from different quarters, sources said that the Department of Revenue will take a call on its after examining the tax implications.

"This would also need to be assessed on basis of the potential number of taxpayers (estimated at 3.5 crore) who may fall out of mandatory tax return filing requirement. Subsequently, the other slab rates -- both under the existing and new regime -- can be adjusted on basis of the revised limits in line with the progressive tax rate system India has always adopted," Parizad Sirwalla, Partner and Head, Global Mobility Services-Tax, KPMG Assurance and Consulting LLP India, said.

Also on the anvil is an increase in the level of standard deduction that is currently fixed at Rs 50,000. This is expected to provide relief to tax payers as medical reimbursement and travel allowance exemption were done away with from FY 2018-19 in lieu of the standard deduction. Higher levels of standard deduction will help individuals to keep with the ever-rising medical cost that has got amplified due to the pandemic and the rising fuel costs.

Sources said that while the level of deduction has not been worked out, if accepted, it may go up to Rs 75,000-Rs 1,00,000 based on various pre-budget recommendations given to the Finance Ministry.

Standard deductions ensure that all taxpayers have at least some income that is not subject to income tax. These generally increase each year due to inflation.

Government finances, that are contrained by lower growth in tax collections, is expected to be augmented in a big way through disinvestment and higher dividend receipts from the RBI. The spectrum auctions and sale of non-core assets of PSUs including their prized land bank may fill the coffers to the extent that the deficit may be prevented from going completely out of hand.

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