Union Budget 2018: Five Reasons Why FM is Likely to Raise Income Tax Exemption Limit from Rs 2.5 Lakh to Rs 3 Lakh

Union Budget 2018-19 is due on February 1st 2018 and in its last regular Union Budget, the NDA-led central government is expected to raise the tax exemption slab from the current 2.5 Lakhs to 3 Lakhs, besides tweaking the tax slabs.

In Budget 2017, the FinMin gave relief to the middle-income group by lowering the tax rate from 10% to 5% for the income tax slab ₹2.5 Lakh - ₹5 Lakh. However, the ministry is mulling over on introducing more changes in Union Budget 2018.

The focus of Union Budget 2018 seems to be around agriculture and mid-income group and here are five reasons why FM is likely to raise Income Tax Exemption Limit from ₹2.5 Lakh to ₹3 Lakh:

1. Retail Inflation

India is witnessing retail inflation in recent times; thereby expanding the exemption limit will provide some relief to the middle-income group of the country.

2. Disposable Income

An increase in the exemption limit would mean more disposable income in the hands of tax payers; hence a spur in demand of goods and spending will in turn boost economic growth.

3. Cost of Living

As per the pre-Budget memorandum presented before the Ministry of Finance by CII, “Considering the steep rise in cost of living due to inflation, it is suggested that basic limit for exemption and other income slabs should be enhanced to give benefit to low income group. The income trigger for peak rate in other countries is significantly higher.”

4. Effect of Demonetisation

As per Industry body FICCI, the government should consider revising the income tax slabs by raising the upper limit for peak tax rate which will help balance the impact of demonetization by boosting demand.

5. Last Streak

Union Budget 2018-19 is supposed to be the last regular budget that Finance Minister Arun Jaitley will prepare with his team, unless the party wins its stay at the PMO office in 2019 General Elections. Therefore, the government will try to make this a populous budget however without hurting its fiscal deficit which is already affected due to passive indirect tax collection post GST roll out on 1st July 2017. Raising the exemption limit from 2.5 Lakh to 3 Lakh will be a safe bet for the Finance Minister to strike the balance.

What’s More?

It is being widely speculated that the government might introduce a new tax slab from ₹5 Lakh to ₹7.5 Lakh and introduce an income tax rate of 10% to this income group instead of the current 20%. Also, the government has been proposed to bring back minimum standard deduction of ₹1 Lakh in Union Budget 2018-19 to increase the purchasing power of the salaried individuals.