Budget 2024: Will Modi administration increase the tax exemption limit to Rs 5 lakh in the new tax system?

The first budget of the Modi 3.0 government, known as the Union Budget 2024, is expected to be introduced in July, possibly towards the end of the month. With approximately one month remaining until the major economic event, different parties, such as taxpayers, will be closely watching Finance Minister Nirmala Sitharaman as she delivers her seventh consecutive union budget in Parliament.

Can we expect tax relief from FM Sitharaman?

Reports suggest that the finance minister may increase the tax exemption threshold in the new tax system to Rs 5 lakh from Rs 3 lakh to stimulate consumption. Increasing the tax exemption limit is anticipated to result in individuals, particularly those in the low-income bracket, having additional disposable income.

Up to Rs 3 lakh – Nil

Between Rs 3 lakh and Rs 6 lakh – 5% (Tax rebate u/s 87A)

Between Rs 6 lakh and Rs 9 lakh – 10% (Tax rebate u/s 87A up to Rs 7 lakh)

Between Rs 9 lakh and Rs 12 lakh – 15%

Between Rs 12 lakh and Rs 15 lakh – 20%

Above Rs 15 lakh – 30%

If the government decides to not tax income up to Rs 5 lakh in the upcoming budget, there will only be five slabs instead of the current six. If the other tax brackets remain unchanged and have consistent rates, a tax refund under section 87A will be applicable for income ranging from Rs 5 lakh to Rs 9 lakh.

Tax obligations will increase if the exemption limit is raised to Rs 5 lakh in the Budget.

• Increasing the exemption limit to Rs 5 lakh from the current Rs 3 lakh under the Modi government would result in reducing the tax burden by Rs 10,400 (inclusive of a 4% Health and Education cess) for taxpayers earning taxable incomes between Rs 7.6 lakh and Rs 50 lakh.
  
• Taxpayers earning between Rs 50 lakh and Rs 1 crore will receive a benefit of Rs 11,440, which includes cess and a 10% surcharge.
  
• People earning between Rs 1 crore and Rs 2 crore would experience a decrease of Rs 11,960 in their tax obligation, which includes cess and a 15% surcharge.
  
• Individuals making over Rs 2 crore can reduce their tax burden by Rs 13,000 (taking into account cess and a 25% surcharge).

In Budget 2020, the Modi government introduced a new tax system that includes additional tiers and reduced tax rates but did not include any tax deduction or exemption measures. In 2023, three years later, the government implemented the Standard Deduction of Rs 50000 as part of the new tax system to encourage more people to file taxes. Last year, the government made the new tax regime the automatic choice for taxpayers, meaning if someone doesn't select a preference, they will be considered to have chosen the new tax regime.

In the next budget, it is very unlikely that the Centre will alter the slabs or tax rates in the old tax regime, as it intends for taxpayers to eventually transition to the new taxation system.