Summary: In Budget 2025-26, the government raised the income tax exemption threshold to ₹12.75 LPA, impacting nearly 1 crore taxpayers. The intention is to encourage economic activity by redirecting the money saved from tax exemptions into consumption, savings, and investments. However, there are concerns about the potential consequences of this move. By lowering the tax base, the government risks reducing future revenue receipts, as seen with previous thresholds. The estimated ₹80,000 crore in tax exemptions may result in a 15% decrease in tax collections. While the government expects this change to boost economic growth, some worry that it could lead to tax evasion and a return to the previous lower income brackets. To mitigate this risk, the government could introduce new financial policies, increase investments, and enhance indirect taxes. While there are hopes for increased foreign and domestic investments, the country’s infrastructural and investment needs might not be fully met. Without timely budget surplus and increased spending, the cycle of revenue imbalance could persist. Overall, while the tax exemption aims to stimulate growth, the long-term effectiveness of the strategy remains uncertain due to challenges in ensuring tax compliance and efficient resource allocation.
Case Problem
Taxable Income is now beyond 12.75 LPA, what are the intentions and what may be the consequences which may arise from this Budget 2025-2026 or Rather a Googly in the form of Budget 2025-26
Opinion
Before going deep into the matter, we need to first understand the early trends of tax (Income Tax Slabs) right from 2014 as a base year without going too far in history and irrespective of the political perception and bias (NDA Govt. insertion into power)
Threshold Limits on Income Tax Exemptions then were on 250000, 500000, 750000, 1275000 INR respectively in consequent budgets in which the 1275000 INR is the latest one for 2025-2026 Fiscal Year.
Government claims that the more income which are tax free now would be working and flowing back into the economy through consumption, savings or by the means of investment.
Seems so interesting and fascinating though, but there is a catch.
Did our policy Implementers and Economists who are formulating and advising the Government Panels has not yet been aware of this these magical postulates earlier and even before the contemporary Government’s tenure (Earlier Political Units in Power).
Why Govt. has taxed on income till 2.5 LPA INR in early years and what has benefitted/lost out in doing so which propels them to increase this threshold to 12.75 LPA INR.
It is to be noted that Finance Minister said in a Pre-Briefing to the Budget 2025-26 that nearly 1 Crore Taxpayers which valued to 80000 Crore INR in Tax Amount (to be payable on Income) is now being exempt from the Income Tax Receivables. Also, the total income tax collection before this budget i.e., 2023-2024 was 6.68 Lac Crore (approx. Figure). Now, this time 80000 Crore INR would be less (minus) the total receivables is considerably a huge figure amounts to 15% approximately of the net Income Tax Receivables in previous Fiscal Year.
As per the government statement, it will route back money saved from tax into the economy as Investment, Savings and Consumption/Asset creation.
This is the positive expectation out of it. But what if Government tries to Capture the Tax Payer Count (Per Head Count) and Tax Evaders/Fraud Database for a whole financial year on the lieu of a considerable single time loss (Income tax Receivable in Revenue Receipts basket) as same likewise in the Demonetization Event of 2017.
But if this would turn otherwise negative, then it may induce the upper taxpayer bracket back into the Below 12.75 LPA bracket as in the case earlier with the 2.5 LPA and 5 LPA bracket thereof.
This will further drag down the revenue receipt in the upcoming times due to the Back-Holding of tax-payment under the Income Tax Slabs.
The above condition would be better off worked and suited well if govt. in its budget policy mentioned key attributes to deviates/mitigate this risk possibility to some new financial instrument by the increased capex, liberalized and increased indirect taxes, Elevating the minimum wages and standardizing the process, alluring investment rates both of domestic as well as cross-border transactions.
Well it is said that Government has put-in some attractive Import and Export rates, FDI inclusion limits but may not at par with the growth what our country needed according to our Infrastructural and Investment Appetite (Due to huge Demographic Dividend Potential) to compete with the Global Economy.
If not chase in time the budget surplus in revenue for increased spending, we may lose out considerably and this cycle goes on till new and effective policy would come in irrespective of one-government benefit policy (Politically biased one).
This tax exemption may never help in doing increase our economy spending and positive outlook due to a big room for tax evasions at every level.
Rather, Government should try to induce New Work Cycles and made Existing Work Cycles more Effective with its policy formulations with ease of convenience for access to build a strong foundation for upcoming events.
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Disclaimer : The above stated Case Problem and Opinion are subject to personal views and approach from a Layman’s point of view and may not stands pragmatic in real world scenario and thus may differ from person to person in their way of solving it. Enjoy the joy of writing and a stimuli of brain to it.
Author: Deepak Sharma | BSc. Physical Sciences (DU), MA Economics (IGNOU), PGC Strategy (IIMB)
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