Sucheta Dalal :Individual tax-payers will now have more money to save or splurge
Sucheta Dalal

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Individual tax-payers will now have more money to save or splurge  

February 26, 2010

Amidst all the debate about fiscal consolidation and roll-back of excise duty concessions, the finance minister has created quite a flutter in an unexpected area. The Union Budget for 2010-11 has provided individual taxpayers with some welcome revisions in tax slabs that would effectively put more money into their wallets. Consumers, who have been feeling the pinch of rising prices, now have something to cheer about.

The revised tax slabs will be as under:

 Income upto Rs 1.6 lakh    Nil
 Income above Rs 1.6 lakh and upto Rs. 5 lakh  10 per cent
 Income above Rs. 5 lakh and upto Rs. 8 lakh   20 per cent
 Income above Rs. 8 lakh  30 per cent



While the primary threshold (amount up to which no tax is payable) remains unchanged at Rs1.6 lakh, the income bracket falling under the 10% tax slab has been revised to Rs1.6 lakh-Rs5 lakh. Previously, this bracket was fixed between Rs1.6 lakh-Rs3 lakh. Similarly, the second slab of 20% tax has been fixed at Rs5 lakh-Rs8 lakh (from Rs3 lakh-Rs5 lakh earlier). The highest tax slab of 30% will now be charged on income in excess of Rs8 lakh, compared to Rs5 lakh earlier.
This dramatic shift in the direct tax policy means a savings bonanza for the inflation-hit consumer. Here is how your savings will shape up under the new tax system:
Suppose you earn an annual income of Rs4lakh, your tax incidence (excluding education cess) will now amount to Rs24,000, instead of Rs34,000 earlier—a saving of Rs10,000.
A person earning Rs6 lakh will shell out Rs54,000 in taxes. In this case, the savings compared to the earlier tax code will amount to a whopping Rs30,000.
Similarly, a person in the highest tax slab, earning say, Rs9 lakh, will be able to save a phenomenal Rs50,000 from the tax differential.
This is not the only carrot extended by the government, either. The existing tax-saving limit of Rs1 lakh has also been raised by an additional amount of Rs. 20,000 for investment in long-term infrastructure bonds.
Industry experts have welcomed the move. Ranjeet Mudholkar, principal advisor, Financial Planning Standards Board India, said, “The further slackening of income-tax slabs will benefit 60% of tax-payers. Apart from these, a tax payer can also avail deduction of Rs20,000 for investment in infrastructure bonds as notified by the Government, in addition to the limit of Rs1 lakh under Section 80C. Hence, from the perspective of financial planning, a tax-payer can channelize more funds towards their chosen financial goals despite earning the same income. Also, to optimise the use of excess disposable income, a tax-payer should employ strategic asset allocation towards better asset-creation in future.”
Nikhil Bhatia, executive director at PricewaterhouseCoopers believes this is an indication of how the slab rates will move from here onwards. “I think it is a step in the right direction. Under the direct tax code (DTC), the tax slab rates are expected to go up substantially. In that sense, it is not much of a surprise because an indication of this was coming through from the DTC itself, where the marginal tax rate has been proposed at Rs25 lakh. It is a populist move; one which will leave more money in the hands of the individual”, he said.
Dr Suresh Surana, founder, RSM Astute Consulting Group, agreed, “The finance minister has attempted to take the tax-payer on the road to the new Direct Tax Code (DTC) (proposed to become effective from 1 April 2011), by bringing the income-tax slab rates in sync with those proposed in the DTC.”
Contributions to the Central Government Health Scheme have also been allowed as deductions within the overall ceiling for tax rebate, besides contributions to health insurance schemes which are currently allowed as deductions under the Income Tax Act.        

The proposals on direct taxes are estimated to result in a revenue loss of Rs26,000 crore for the government.
Sanket Dhanorkar and Pratibha Kamath


-- Sucheta Dalal