Relief to middle class? Inflation offsets hike in tax exemption limit

Analysing the numbers

Let’s delve deeper into the numbers. In FY 2013-14, individuals earning Rs 700,000 paid a tax of Rs 70,000, and those with an income of Rs 15,00,000 faced a tax liability of Rs 280,000.

In stark contrast, by FY2024-25, taxpayers earning Rs 700,000 are exempt from tax, while those earning Rs 15,00,000 pay only Rs 140,000.

This significant reduction in tax liability highlights the government’s intention to provide relief to taxpayers. However, one must consider the inflationary impact of these changes, as explained by Chetan Daga, founder of AdvantEdge Consulting.

Assuming an annual inflation rate of 8%, the Rs 250,000 threshold from FY 2013-14 would equate to approximately Rs 513,000 in FY 2024-25.

While the government has increased the non-taxable income limit to R500,000, this change essentially aligns with inflation rather than providing genuine tax relief, according to Daga.

The reality of Inflation

“If we change the assumption of inflation rate from 8% to 11% per annum, Rs 250,000 in FY 2013-14 nearly becomes Rs 700,000 in FY 2024-25.

As such, the increases in basic exemption limit and corresponding tax reliefs appear largely inflationary in nature, and not in the nature of extra concessions given by the government,” illustrates Daga. He adds, though the New Tax Regime has certainly eased the compliance burden for the taxpayers, but has not granted significant tax savings in the real sense, after adjusting the effect of inflation.