Investing.com – The Indian government is considering cutting income tax for individuals earning up to 1.5 million rupees ($17,590) a year in the upcoming February budget. The goal is to ease the financial burden on the middle class and stimulate consumption as the economy slows, according to two anonymous government sources who spoke to Reuters.
This potential tax cut could provide relief to tens of millions of taxpayers, especially urban residents suffering from high costs of living. However, the benefits will only apply to those who opt for the 2020 tax regime that eliminates some exemptions, such as those related to rental housing.
In the 2020 tax regime, income ranging from Rs 3 lakh to Rs 1.5 lakh is taxed at a rate of 5% to 20%. Any income exceeding this bracket is subject to tax at a rate of 30%. Indian taxpayers have the option of choosing between this system and the old plan. The latter offers exemptions on housing rents and insurance but at slightly higher rates.
The sources, who requested anonymity because they were not allowed to speak to the media, said that the exact extent of the tax cuts has not yet been determined. The decision will be made closer to the budget announcement on February 1.
The Ministry of Finance did not respond to requests for comment. The sources declined to provide estimates on the potential revenue loss resulting from the tax cut. However, one source noted that lower tax rates may encourage more people to choose the newer, less complex tax system.
The bulk of income tax revenues in India come from individuals who earn at least 10 million rupees annually, subject to tax at a rate of 30%.
The proposed tax cuts could stimulate the economy by putting more money into the hands of the middle class. The Indian economy, the world's fifth-largest, grew at its slowest rate in seven quarters from July to September. High food inflation has also affected demand for a variety of goods, from personal care items to cars, especially in urban areas.
The government came under political pressure from the middle class due to high taxes and wage growth that could not keep up with inflation.
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