NEW DELHI: The Global Trade Research Initiative (GTRI) has recommended raising the IT exemption threshold to Rs5.7 lakh in the upcoming Union Budget 2025.
The move, aimed at aligning with inflation, could provide much-needed relief to taxpayers, simplify the tax system, and promote equitable treatment across financial instruments.
The current exemption threshold of Rs2.5 lakh has remained unchanged since 2014, eroding its real value due to inflation. According to GTRI, adjusting the threshold would help low-income earners, such as skilled workers earning the Delhi minimum wage of Rs21,917 per month (Rs2.63 lakh annually), avoid the need to file returns.
Adjusting for inflation
GTRI advocates for a comprehensive review of fixed deductions and exemptions to restore their purchasing power. The suggestions are the following:
The Rs10,000 annual deduction introduced in 2013 is now worth Rs5,000; this should increase to Rs19,450 by 2025. The Rs1.5 lakh deduction for life insurance premiums and provident fund contributions should rise to Rs2.6 lakh to reflect current economic realities.
Deductions against medical insurance premiums was last revised in 2016 to Rs25,000. This deduction has lost value to Rs14,750. GTRI recommends increasing it to Rs41,000 by 2025.
Tax regime reforms
Under the current dual tax regime, the new system offers lower rates but no deductions, exempting income up to Rs3 lakh and taxing incomes between Rs3-7 lakh at 5 per cent. Incomes above Rs15 lakh are taxed at 30 per cent.
In contrast, the old regime allows deductions but exempts only up to Rs2.5 lakh, taxing income between Rs2.5-5 lakh at 5 per cent, Rs5-10 lakh at 20 per cent, and above Rs10 lakh at 30 per cent%. GTRI suggests indexing tax slabs to inflation to protect taxpayers’ purchasing power and make the system fairer.
Simplifying TDS
GTRI also calls for simplifying the Tax Deducted at Source (TDS) mechanism, which has grown from its original four categories in 1961 to over 40 today. Despite this complexity, most TDS revenue is derived from salaries and dividends. Simplifying these rules, supported by digitisation and interconnected databases, could ease business operations without impacting compliance or revenue collection.
Equalising tax treatment
GTRI highlights disparities in tax treatment between fixed deposits and equities. Currently, long-term capital gains on equities held for one year are taxed at 12.5 per cent, while fixed deposit interest is taxed at individual slab rates of up to 30 per cent. This imbalance discourages household savings in fixed deposits.
To address this, GTRI proposes capping the tax on fixed deposit interest earned from deposits held over one year at 12.5 per cent for individuals, under certain conditions. This measure would level the playing field and encourage greater savings in fixed deposits.
Call for comprehensive tax reforms
“Inflation is a major worry for everyone,” said GTRI founder Ajay Srivastava. “We recommend raising exemptions to match inflation, reclassifying F&O as speculative activity, and equalising tax treatment for bank deposits and equities.”
By aligning exemptions and deductions with inflation, simplifying tax rules, and addressing disparities in financial instruments, GTRI’s proposals aim to create a fairer tax system that boosts savings, enhances compliance, and supports economic growth.
