The main thrust and focus of the upcoming budget should be to alleviate rural distress, stimulate urban consumption, deal with inflation, and foster socio-economic aspirations and expectations of the ‘middle class’,
Published Jan 09, 2025 | 12:00 PM ⚊ Updated Jan 09, 2025 | 12:10 PM
Property tax representational image (iStock)
Finance Minister Nirmala Sitharaman is all set to present the Union Budget 2025 on 1 February. Ahead of the budget, South First is bringing you a series of articles highlighting the tax burden on middle class and the reforms needed to ease this burden on taxpayers. This opinion piece is the second article in the series. Read the first part that explains why the salaried class feels burdened with taxes and rising cost of living here.
Finance Minister Nirmala Sitaraman will be presenting her eighth consecutive Union Budget on 1 February. This will be the first full budget of the NDA government for the financial year 2025-26 (FY26).
The finance minister, while charting the growth path on the direction of how the country should progress in achieving the set goals, is unfortunately faced with daunting issues of the gross domestic product (GDP) nosediving to 5.4 percent in the second quarter 2 (July-September 2024), which is the lowest in two years.
She will also have to face the challenges of muted rural demand, conspicuous slowdown in urban consumption due to stagnant salary/wages, unemployment at 8 percent, December Purchasing Managers’ Index (PMI) falling to a 12-month low at 56.4 (above 50 reflects expansion), low credit off-take coupled with muted deposit growth in the October — December quarter (Q3) of 2024-25, and rupee volatility breaching ₹85 against the US dollar.
The worst will be the runaway consumer price index (CPI) inflation of 6.2 percent in October 2024, the highest in 14 months (5.5% in September).
Though the November CPI has moderated to 5.48 percent, the food inflation remains elevated at 9.04 percent. It accounts for half of the consumer price basket and is ‘killing’ the poor and middle class, especially the soaring prices of tomatoes, onions, and potatoes.
Even as we started witnessing green shoots in private capital expenditure (CAPEX), what shocked us was the ‘claw-back’ in the central government CAPEX. It was only ₹5.13 lakh crore as of November end (₹11.11 trillion budgeted for FY25), a decline by 12.3 percent year-on-year. This will seriously impact employment, income, and savings multiplier effect, thus reducing the disposable income in the hands of the people.
Hence, the main thrust and focus of the upcoming budget should be to alleviate rural distress, stimulate urban consumption, deal with inflation from the supply side, and foster the socio-economic aspirations and expectations of the ‘middle class’, coupled with driving the overall growth of the economy in FY26 in the range of 6.5/7 percent.
To revive, and the urban and rural consumption for ‘demand-pull’ results, the finance minister in this budget will have to mandatorily provide income tax reliefs by way of tax reductions, rationalisation of tax slabs, and hike in standard deduction, which will ensure reduction in tax outgo and increase the disposable income with people.
Now that there are no state elections other than Delhi in February and Bihar at the end of the year, the central government has no political compulsions and can boldly take decisions regarding direct taxes and GST rationalisation. The government has already set the tone in the last budget by setting up a committee for overhauling the ‘direct tax code’
The last time major changes were made in the tax rates was seven years ago in 2017-18, when Arun Jaitley was at the helm. It was then that the current slabs were brought into vogue. Sitaraman brought in a new tax regime in the budget 2020 with lesser rates without frills/no rebates alongside the old tax regime with I-T benefits but with higher tax rates.
Subsequently, in 2019 and the last budget, tinkering has been effected by raising the tax rebate u/S 87A to ₹12,500 from ₹2,500 and tax rate at 5 percent in the ₹3 lakh to ₹7 lakh slab, which was earlier ₹3 lakh to ₹6 lakhs which will apply only to the new tax regime to nudge taxpayers to move from the old to the new tax regime.
During FY 2024-25, out of the 7.28 crore ITRs filed, 5.27 crore were in the new tax regime.
To reduce middle-class stress, boost urban consumption by facilitating larger disposable income, and promote household savings which has been dwindling, it would be most appropriate for Sitaraman to take certain actions:
1. Revise the income tax slab of “income up to ₹5 lakh” under NIL slab. This will marginally offset inflation effect. Consequently, marginal tax rates can be reduced for individuals earning up to ₹15 lakhs. It is an insult and a mockery if the highest income tax slab rate at 30percent is higher than the peak corporate tax rate.
2. Raise the standard deduction limit to ₹1 lakh to put more money in the pockets of salaried class.
3. Increase the tax benefits for medical/health insurance premium paid u/S 80D from the present ₹25,000 to ₹40,000 and for senior citizens to ₹70,000 per fiscal year to encourage savings, higher medical coverage under family floater schemes and protect from the onslaught of new strains of viruses.
4. Increase ceiling limit on tuition/hostel fee paid to children, at least to ₹500 per month without bringing it u/S 80C.
5. Increase the ceiling for rebate u/S 80C – separately of ₹1.5 lakh additional for principal deduction of housing loan EMIs and not to be clubbed with the ‘Omnibus’ benefits under the said section.
6. Enhance deduction under interest paid for housing loans from ₹2 lakhs to ₹3 lakh u/S 24/24B.
7. Limit u/S 80EEA to be raised from present ₹1.5 lakh to ₹2 lakh for apartments/house properties having ‘stamp value’ of ₹45 lakh.
8. Interest deduction from EMIs u/S 80EE to be increased from the present ₹50,000 to at least ₹1 lakh for loan amount of up to ₹35 lakh for property value of up to ₹50 lakhs by removing rider of ‘first loan’ which pertains to deductions for ‘affordable housing’ and rebates under principal and interest for borrowers who avail housing loans from banks and HFCs under the old I-T slab regime. In all fairness, to promote affordable housing which has taken a beating, the benefits should be extended to the new I-T regime too.
9. To augment supply of affordable housing, compensation to the builders, the tax holiday on profits earned from “Affordable Housing Projects” u/S 80IBA has to be extended by at least one more year, for projects approved till 31 March 2024.
10. Tax sops from rental income to boost investment in rental housing. Urban housing shortage which is at 20 million is expected to double by 2030.
The above tax reliefs and relaxations will not only reduce the middle class stress but will also push consumption and promote economic growth.
((S Narendra is a Bengaluru-based banker, economist and guest columnist. Views are personal. Edited by Majnu Babu).
