Jaitley prepares bonanza for middle class, may increase I-T exemption to Rs 3 lakh

The Union Budget for fiscal year 2016 is nearing and it is that time of the year when the middle-class starts hoping against hope that the incumbent finance minister will be merciful enough to offer some  tax sops.

Usually there are drummed up expectations during the time that the government will increase the income tax exemption limit. Ditto this year.

And now a report in the Mail Today has said that the government is planning to increase the income tax exemption  limit to Rs 3 lakh from the present Rs 2.5 lakh.

The report citing sources has said that the move is aimed at placing “more money in the hands of consumers so that demand picks up” in the economy. Accordingly, the Budget is also likely to affect some changes in tax slabs by giving relief to the lower-income category and imposing higher taxes for the high-income group.

The move will be a gift to the middle class, who were in the forefront in voting the BJP to power in the last general elections.

Jaitley had in the last budget increased the tax exemption limit from Rs 2 lakh in the previous year. That was also aimed at putting more money in the middle-class’s pockets. The move, however, failed to deliver as consumer confidence is yet to see a pick up.

The reason for the failure is the high inflation and interest rates that prevailed almost through out the year. However, this time it could be different since both are trending downwards now.

Retail inflation in the country stood at 5 percent in December as against 9.87 percent in the year-ago period. Responding to the lower inflation figures, the RBI has also cut its interest rates by 25 basis points to 7.75 percent. Expectations are that the central bank will cut rates by 50-75 bps in the year ahead.

If the finance minister increases the exemption limit now, it is likely to boost the urban consumption.

The exemption limit has witnessed an almost steady increase from just Rs 1 lakh in 2005-06 to Rs 2.5 lakh last year. The limit was increased to Rs 1.10 lakh in 2007-08, Rs 1.50 lakh in 2008-09, Rs 1.60 lakh in 2009-10, Rs 1.80 lakh in 2011-12 and Rs 2 lakh in 2012-13.

The Mail Today article says the super-rich, who already pay a 10 percent surcharge on the 30 percent income tax they pay, will be slapped with a higher 33 percent tax, thus creating a separate tax bracket. Any individual who earns more than Rs 1 crore a year is considered super-rich. Then finance minister P Chidambaram had said in his Budget speech for 2013-14 that there are only 42,800 individuals in India who earn Rs 1 crore a year.

(Data support from Kishor Kadam)