As Finance Minister Nirmala Sitharaman prepares to present the last budget of the Modi 2.O government, expectation is building for relief on the personal income tax front. Indications are that the Minister may not disappoint.

While rates under both the old and new tax regimes are unlikely to be tweaked, a change in thresholds and exemptions is on the cards. Government sources said under the old income tax regime, the lower slab of Rs 2.5 lakh may be raised by Rs 50,000, which could result in a direct saving of Rs 1,250. A rise in the lower slab could push up the rebate, and ensure that people with an annual income of Rs 5.50 lakh do not have to pay tax.

Another option is for raising the standard deduction, which is currently available under both the tax regimes. While standard deduction of Rs 50,000 will be available under the new regime from FY24, this amount has been applicable under the old regime since FY20. However, the current thinking is to raise standard deduction by Rs 10,000 under both the schemes from FY25, in order to fight inflation, particularly food prices. Though core inflation (headline inflation minus food and fuel inflation) is down, food inflation is getting more uncertain because of unpredictable weather.

Interim Budget may see measures to boost consumption demand, push agri economy

Though there have been demands for raising exemptions available under Section 80C of the Income Tax Act for the old tax regime, the government is not keen to do so considering its strategy to popularise the new tax regime, which does not account for exemptions, except contributions to the National Pension System (NPS). Since the new tax regime will be the default option from Assessment Year 2024-25 (FY 24), one will have to tick the box in the ITR for continuation of old tax regime.

Will the upcoming interim Budget have big announcements?

Normally, with the country going to the polls, the government does not make major changes or announce new policies in the interim budget. However, the then acting Finance Minister, Piyush Goyal, had announced some key measures on the income tax front in the interim budget of FY 20. Individual taxpayers with annual taxable income up to Rs 5 lakh got a full tax rebate and, therefore, were not required to pay any income tax. Even persons having  gross income up to Rs 6.50 lakh, did not have to pay any income tax if they had investments in provident fund, specified savings, insurance, etc.

The FY 20 interim budget also raised the standard deduction for salaried persons to Rs 50,000 from Rs Rs 40,000. This provided a tax benefit of Rs 4,700 crore to more than 3 crore salary earners and pensioners. Apart from this, levy of income tax on notional rent on a second self-occupied house was exempted, and the TDS threshold on interest earned on bank/ post office deposits was raised to Rs 40,000 from Rs 10,000.