The Income Tax rules in India change as India changes. At the time of independence, India was a low-income country with no mature industries and a non-existent service sector. We were primarily an agricultural country. Today, India is the world’s fastest growing trillion dollar economy – a very different country than it was in 1947.
After independence, India had 11 tax slabs. People in the highest tax bracket had a crushing tax rate of 97%. Over the next 70 years, different governments would carry forward the same trend – reducing the number of slabs, and decreasing the tax rates. This was made possible by India’s growing prosperity and more people becoming eligible to pay taxes. The governments no longer needed certain individuals to pay a very large percentage of their income in taxes as the same revenue targets could be met by imposing a nominal tax rate on a larger group of people.
The 2020 budget reversed this historic trend of decreasing income slabs, as the number of slabs increased from 4 to 7. But the budget did continue the trend of cutting tax rates.
Benefits of the new income tax slabs
The new income tax regime is optional – people can choose to file returns under the older tax rates. But the updated system has a host of benefits that are missing under the old system.
Some of these benefits are:
Overall lower taxes.The 2020 budget slashed the tax rate for millions of people. Some brackets have been left unaffected, but a majority of the taxpayers can pay fewer taxes under the new system. The exact changes in the tax rates are explored in the next section.
Will boost consumer demand. The lower tax rateswill mean people will have more disposable income every month. People will use this income to buy items they need and want, thereby increasing the demand for consumer goods in the market. This will lift up some sagging markets like automobiles, real estate, and white electronic goods.
Simpler Filing Process.Filing the Income Tax Returns will be a much simpler process as nearly 70 odd exemptions and deductions have been removed. The savings that people used to get under exemptions and deductions have been passed on to the taxpayer through lower rates. The finance minister has claimed that pre-filled forms will be made available from April – people will no longer need the help of a CA to fill and upload their tax returns.
More Indians under the tax fold.Lower tax rates shrink the scope for off-the-books transactions as they kill incentive for tax evasion. This will bring in more Indians under the income tax fold.
Increased Tax Revenue. With more Indians paying taxes, the government revenue might increase substantially under the new system. The increased revenue can be reinvested in creating employment opportunities, new schools, hospitals, etc.
A Side-by-Side Comparison of the New and the Old Income Tax Slabs
|Income Slabs||Old Tax Rate||Current Tax Rate|
|1||Less than ₹2,50,ooo||Nil||Nil|
|2||₹2,50,ooo to ₹5,00,ooo||5%||Nil|
|3||₹5,00,ooo to ₹7,50,ooo||20%||10%|
|4||₹7,50,ooo to ₹10,00,ooo||20%||15%|
|5||₹10,00,ooo to ₹12,50,ooo||30%||20%|
|6||₹12,50,ooo to ₹15,00,ooo||30%||25%|
Income groups that will benefit the most
Two income groups will benefit the most under the new tax regime. Individuals earning between ₹5,00,ooo to ₹7,50,ooo had a tax rate of 20% before the budget – their new tax rate is 10%. Therefore, their tax liabilities have been cut in half. People earning between ₹10,00,ooo to ₹12,50,ooo had to pay nearly 1/3rd of their income in taxes – under the new system, their tax liabilities have been reduced to 1/5th of their total income.
Whether the new system suits you better or whether the old system gives you greater tax savings, the Finance Minister made a good move by providing Indian tax-payers with options.
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