Budget 2025- A summer's rain for the Indian middle class

We all started listening to the budget speech with a long wish list and zero expectations! However, the middle class was in for a surprise. Of the long speech by FM Nirmala Sitharaman, our attention was caught by the last line,”Up to 12 lakhs no tax.”

Let's delve deeper into the devil called details of the statement ‘up to 12 lakhs no tax’. (If you know the details skip to the next segment)

1. This is applicable to the new tax regime only.

2. The slab is not starting from 12 lakhs. Simply put, not everyone gets zero tax till 12 lakhs! 

1. For less than 12 lakhs. Congratulations! While filling the return you'll get a full tax rebate (rebate is like a discount coupon that you can apply when you file your taxes). So zero tax.

2. 12 to 12.75 lakhs: To ensure fairness for those whose income is just above 12 lakhs (up to 12.75 lakhs), a marginal relief is provided. (Marginal relief is like grace marks that is given to students who fail the test with a mere 1 or 2 marks) Rebate is not applicable to this category. So, calculate your total tax as per new tax rate (see point 2.c below). Then apply a special coupon called marginal relief. This won't make your tax zero but rather give a discount worth the taxes you paid till 12 lakhs. So effectively you are paying for what is above 12 lakhs. 

3. For incomes greater than 12 lakhs (between 12l and 12.75l see point 2.b first). If you fall into this category, congratulations, you’re officially in the ‘above average salary’ club! Before we start crying about taxes, Madam FM wants us to take a second to be thankful for being able to afford to cry into our lattes instead of the humble and tasty roadside cutting chai. Simple interpretation for this category: Beyond 12 lakhs, regular tax slabs apply without rebates or marginal reliefs. Good news is tax slabs and tax rates have also changed (for the better!).

3. New tax rates for those above 12 lakhs

0-4 L- nil

4-8L - 5%

8-12L- 10%

12-16L - 15%

16-20L- 20%

20-24L- 25%

Above 24L - 30%

While a person earning 18L saves Rs. 70000 in taxes, a person above 25L saves 1.1L in taxes compared to previous tax slabs.

4. Rebates and marginal reliefs are not applicable for income from capital gains, lottery income, etc.

5. Standard deduction of Rs. 75000 applies to all income categories. 

6. This decision is estimated to have an impact of 1 lakh crores on the tax revenue collection. 

‘Aj khush to bohut hoge tum!’ applies to many in the above categories, but there's a troubling trend I'd like to point out. India seems to be shifting from direct taxation to indirect taxation. And historically such directional shifts have been termed regressive because they are harder on the poor and middle class. Where will the 1 lakh crore relief provided for the ‘below 12 lakh’ income group be funded from? C'mon, it's GST that you and I will pay on everything. Instead of an incremental slab of 5%,10%, etc based on our income, now we'll pay a flat 18% GST on everything we buy! I urge the GST council to expand the list of goods categorised as essential (essentials have either 0% or 5% GST rate) otherwise all of a sudden people above 12 lakh income will start feeling poorer than those below 12 lakhs owing to double taxation.

Another major issue with the directional shift towards indirect taxation is to push people to take goods and services without the bill only to save on taxes i.e. all that the govt tried to achieve with demonetization will go for a toss. This might become the reason for much greater tax evasion.

To summarise, yes, it's a great relief for the forever neglected salaried middle class. But the gradual shift to indirect taxation has more glaring disadvantages than advantages. We need to be careful as we tread this path.