Finance Minister Arun Jaitley may double the income tax exemption threshold for the salaried from the present Rs. 2.5 lakh to Rs. 5 lakh while also reinstating tax-free status for medical expenses and transport allowance, providing some relief to the section already under strain since demonetisation.
Though propriety demands that not too many policy changes should be made in an interim Budget, the BJP government is apprehensive of the possibility of a middle-class backlash in the impending general elections.
Hence the plan to streamline tax slabs, which in any case are in consonance with the coming Direct Tax Code, government sources told news agency IANS.
The problem that may manifest itself is that the Union Budget will precede the unveiling of the Direct Tax Code Report on February 28. Tinkering with the tax rates before the release of the report will make it contentious.
The new Direct Tax Code will try to bring more assessees into the tax net, make the system more equitable for different classes of taxpayers, make businesses more competitive by lowering the corporate tax rate, and phase out the remaining tax exemptions that lead to litigation. It will also redefine key concepts such as income and scope of taxation.
At the moment, income up to Rs. 2.5 lakh is exempt from personal income tax. Income between Rs. 2.5 lakh and 5 lakh attracts a 5 per cent tax (see table), while that between Rs. 5 lakh and Rs. 10 lakh is levied with a 20 per cent tax. Income above Rs. 10 lakh is taxed at 30 per cent. Exemption on income up to Rs. 5 lakh is only applicable to individuals of over 80 years.