GTRI Recommends Raising Income Tax Exemption Threshold to Rs 5.7 Lakh in Upcoming Budget

The Global Trade Research Initiative (GTRI) has proposed that the income tax exemption threshold be increased to Rs 5.7 lakh to align with inflation. This suggestion aims to simplify the Tax Deducted at Source (TDS) system and equalise tax treatment for bank deposits and equities. The current threshold of Rs 2.5 lakh, unchanged since 2014, has lost its real value due to inflation.

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The GTRI report highlights that the minimum wage for a skilled worker in Delhi is Rs 21,917 monthly, or Rs 2.63 lakh annually. This means many lower-income workers, like drivers or multi-tasking staff, could avoid filing tax returns if the threshold is adjusted. The Union Budget 2025 presents an opportunity to recalibrate India's direct tax system to better meet economic needs.

Adjustments for Inflation

GTRI suggests increasing fixed deductions and exemptions to account for inflation. The Rs 10,000 deduction for savings deposit interest from 2013 is now worth only Rs 5,000. By 2025, it should rise to Rs 19,450. Similarly, the Rs 1.5 lakh deduction for life insurance premiums and provident fund contributions should be adjusted to Rs 2.6 lakh by 2025.

The deduction for medical insurance payments, last updated in 2016 at Rs 25,000, has decreased in value to Rs 14,750 today. By 2025, this should be increased to Rs 41,000. These adjustments would ensure that tax benefits maintain their real value over time.

Tax Regime Comparisons

Currently, taxpayers can choose between the old and new income tax regimes. The new regime offers no deductions but has lower tax rates, exempting income up to Rs 3 lakh. Incomes between Rs 3-7 lakh are taxed at 5%, while those above Rs 15 lakh face a 30% rate.

The old regime exempts income up to Rs 2.5 lakh and taxes income from Rs 2.5-5 lakh at 5%. Income between Rs 5-10 lakh is taxed at 20%, with a rate of 30% for income above Rs 10 lakh. GTRI advocates for inflation-indexed tax slabs and exemptions to protect taxpayers' purchasing power.

Simplifying TDS

GTRI also recommends simplifying the TDS system introduced in 1961 with four categories: salaries, interest on securities, dividends, and contractor payments. It has since expanded to include over 40 categories of TDS and numerous versions of TCS.

Despite this expansion, most TDS revenue comes from a few sources like salaries and dividends. Simplifying TDS rules could ease business operations without affecting revenue collection due to digitisation and interconnected government databases ensuring compliance.

Equalising Tax Treatment

There is a disparity in taxation between bank deposits and capital market gains. Long-term capital gains from equities held for one year are taxed at 12.5%, while fixed deposit interest is taxed at individual slab rates up to 30%. This encourages households to prefer equities over fixed deposits.

To address this imbalance, GTRI suggests capping the tax on FD interest earned from deposits held over a year at 12.5% for individuals under certain conditions. This would encourage more household savings in fixed deposits by levelling the playing field with stock market investments.

"Inflation is a major worry for everyone," said GTRI Founder Ajay Srivastava. "We suggest raising tax exemptions to match inflation, reclassifying F&O as speculative activity, and equalising tax treatment for bank deposits and equities." These reforms aim to create a fairer tax system that encourages savings and supports economic growth.