Economy
With incentives and deductions, middle-income share in India’s tax kitty shrinks
Summary
- While more middle-income earners are paying tax, their share in the government's overall personal tax collection has declined following a series of reforms and relief measures over the years aimed at setting the balance right.
While individuals have been paying more income tax than businesses for two years, that masks a less-obvious shift: the share of middle-income earners in the kitty has fallen over the past five years, thanks to deductions and incentives, even as the contribution of wealthier taxpayers has risen.
Taxes paid by those with an annual liability up to ₹1,50,000 slipped from 19.2% of overall personal tax collections in the assessment year 2020 to 13.3% in AY24, according to a Mint analysis of the Income Tax Department’s data for five years.
Also, the number of return filers with zero liability jumped about 50% from 27.4 million in AY20 to 47.4 million in AY24.
An assessment year is the one in which returns are filed for the income earned in the previous financial year.
Also read | Redo the Income Tax Act not just to simplify but rationalize taxation
To be sure, the aggregate tax paid by middle-income earners rose in absolute terms—except for the pandemic-hit AY21—tracking the buoyancy in the government's overall personal tax revenue in a growing economy.
That's most likely because the number of such taxpayers rose. The returns filed by those with an annual liability of up to ₹1,50,000 rose steadily between AY20 and AY24—except in pandemic-hit AY21. However, the growth in the aggregate tax for this group in each of these assessment years has been slower than that of those paying higher taxes.
The declining share of this cohort in the overall personal tax collection, along with a higher number of zero-tax filers, follows a series of relief measures over the years.
A friendlier tax regime
Former finance minister Arun Jaitley introduced a standard deduction of ₹40,000 for salaried employees in AY20, which was raised to ₹50,000 later. In the interim budget of 2019-20, then finance minister Piyush Goyal exempted people earning up to ₹500,000 (after deductions) from tax.
Finance minister Nirmala Sitharaman introduced the new personal income tax regime with lower rates in 2020 and sweetened the incentives by raising the tax rebate to ₹7,00,000 from the earlier ₹5,00,000 and increased the basic exemption limit to ₹3,00,000 from ₹2,50,000. She also introduced a standard deduction in the Union Budget for FY24.
The new tax regime with reduced, concessional rates helped empower the middle class and offers a rebate for a total income up to ₹7,00,000 and a standard deduction of ₹75,000, said Sandeep Sehgal, partner-tax at AKM Global, a tax and consulting firm.
Also read | How salaried taxpayers can increase their take-home pay after this rule change
Earlier, a tax liability of up to ₹1,50,000 would cover middle- and upper middle-income earners, who paid 30% tax on part of their income under the old tax regime.
Individuals aged under 60 years and earning up to ₹11,25,000 would pay a tax of ₹1,50,000 under the old tax regime if they didn’t claim any exemptions. Depending on deductions and age, even those with a higher income would fall into this bracket.
However, under the new personal income tax regime, those with an annual income of ₹15,00,000 would face a similar tax liability of ₹1,50,000.
Outpacing corporate tax
Meanwhile, there has been an uptick in the share of wealthier taxpayers with a higher liability— ₹5,00,000-10,00,000, ₹10,00,000-20,00,000, and ₹20,00,000-50,00,000—in the overall personal tax kitty. Absolute collections rose for all these groups as well.
The new tax regime limits the scope for traditional deductions and exemptions but despite that, many people, including high net-worth individuals (HNIs), are increasingly opting for it, said Sehgal. “A key attraction is the simplicity for the middle class and the lower surcharge of 25%, compared to 37% under the old regime, making the new system more tax-efficient for different kinds of taxpayers."
Also read | CTC vs take-home pay: New tax regime gives better visibility
These taxpayer-friendly measures reflect the government's strategy to drive financial inclusion and incentivize voluntary tax compliance across all economic segments, he said.
The Union government’s direct tax collections have been growing twice as fast as India’s economic growth rate, aided by personal income tax collections, which have outpaced corporate tax receipts in the last two financial years and so far this fiscal year as well.
“There is strong growth in personal income tax collection even with the lower tax rates in the new personal income tax regime," said former finance and revenue secretary Ajay Bhushan Pandey, who is currently the chairperson of the National Financial Reporting Authority.
“The entire system of taxation is driven by data and information captured in the annual information statement. The AIS, the elaborate system of taxes deducted at source, the entirely online system of tax return filing and pre-filled returns, the linkage of Permanent Account Number and Aadhaar, the faceless assessment system, limits on cash transactions and formalisation of the economy have made direct taxation more efficient, transparent, and minimally obtrusive" explained Pandey.
