How Much Excess Tax Are You Paying? Common Man's Hopes For Budget 2024 EXPLAINED

In the old regime, the tax slabs seem to be frozen at the 2013 level, resulting in inflated tax rates for the taxpayers. These rates are not indicative of the increase in the daily living expenses

Between the new and the old tax regime, the common public still seems to be preferring to stick to the earlier system. Unlike the old tax regime, the new one doesn’t factor in several tax deductions such as rent, tax-saving investments, medical expenses, etc. Therefore, multiple taxpayers with lower liabilities prefer the old tax regime to reduce their tax burden with the help of these deductions.

However, without adjusting for inflation, the tax rates in both regimes seem to be outdated and ineffective. Taking the inflation into account, a detailed analysis by Bankbazaar found that every single rupee earned in 2012-13 stands equal to Rs 0.55 in 2024-25.

Adjusting for inflation using the Cost Inflation Index, the study says that Rs 10 lakh earned in the 2012-13 fiscal year is equivalent to Rs 5.50 lakh in 2024-25.

In the old regime, the tax slabs seem to be frozen at the 2013 level, resulting in inflated tax rates for the taxpayers. These rates also are not indicative of the increase in the daily living expenses for an individual. Here, 2012-13 has been assumed as the base as the Union Budget 2012-13 introduced changes to the tax slabs of 20 per cent and 30 per cent.

Therefore, in order to maintain the same purchasing power, an individual who earned Rs 1 in 2012-13 will have to earn Rs 1.81 in 2024-25. This essentially means an individual with an income of Rs 10 lakh in 2012-13 will have to earn Rs 18.5 lakh in 2024-25 to maintain the same standard of living and purchasing power.

The multitude of options available to claim deductions and refunds allows taxpayers in the lower income bracket to benefit from the frozen tax slabs of 2013-14 levels in the old tax regime.

While the new regime doesn’t tax any individual with an income of Rs 7 lakh and under, the slabs under this system also haven’t been adjusted for inflation. While they may appear inflation-friendly, a closer inspection reveals that the benefit of the regime is only limited to those with an income of under Rs 15 lakh. 

How Are You Paying Excess Taxes?

However, in an inflationary economic period, taxpayers are bound to find themself under stress and in dire need of relief via higher tax slabs and enhanced deductions.

For instance, the tax liability on an income of Rs 10 lakh stands at 11.7 per cent or Rs 1.17 lakh as per the old regime. The tax applicable on the same income in the new regime is 6.24 per cent or Rs 62,400.

On adjusting the tax slabs for inflation, the tax should be reduced to 7.3 per cent, the study argued. 

Similarly, for individuals with income over Rs 15 lakh, the tax rates applicable as per the new tax regime don’t seem to be adjusted for inflation. In the old regime, incomes above Rs 5 lakh are attracting a higher tax rate that hasn’t accounted for inflation.

Since the income tax brackets are not factoring in inflation, taxpayers today are being made to essentially pay excess taxes.

Changes Proposed In Old Tax Regime

Based on the Cost Inflation Index, the study found that the value for 2012-13 stood at 200 and for 2024-25, it touched 363. This implies that the index has soared by 81.5 per cent. This can be rectified if the government updates the 20 and 30 per cent tax slabs in the old regime.

The analysis calls for increasing the 0 per cent tax slab from the current income limit of Rs 2.5 lakh to Rs 5 lakh. The study calls for an increase in the 5 or 10 per cent tax slab from the income range of Rs 2.5-5 lakh to Rs 5-9 lakh, while it suggests raising the 20 per cent tax slab from Rs 5-10 lakh to Rs 9-18 lakh. Finally, the 30 per cent tax slab should be enforced for income above Rs 18 lakh, against the current limit of Rs 10 lakh and above.

Increase In Deduction Limits

Additionally, there are also calls for increasing the deductions limit in the old tax regime. Chintan Ghelani, Associate Partner, N A Shah Associates, said, "An increase in the basic exemption limit is anticipated to offer much-needed relief to low and middle-income earners. This move, along with a revision of tax slabs, is expected to reduce the overall tax burden on the middle class, promoting greater
disposable income and stimulating consumption. Moreover, enhancing tax deductions and exemptions remains a key focus. Raising the
deduction limit under Section 80C from the current Rs.1.5 lakh to Rs.2.5 lakh would incentivize savings and investments, contributing to financial security for individuals."

Om Narayan Singh, Founder, Digital Gramin Seva (DGS), IMOC Digital Services Pvt Ltd, echoed the sentiments and said that the Budget should focus on easing the tax liabilities of the middle-income groups. The executive called for an increase in Section 80C threshold from Rs 1.5 lakh to Rs 2 lakh or more per annum. He noted that revisions in tax slabs such as 5 per cent, 10 per cent, and more might help ease things for the common public.