(Source: BloombergQuint)

Modi And Your Money: How India’s Salaried Taxpayers Fared

Nearly five years after Narendra Modi promised “Achche Din”, his government prepares to present its last budget. While it’s an interim budget, there’s speculation that the government will use the opportunity to appease the salaried taxpayer ahead of the general election.

The number of such taxpayers stood at 2.3 crore in 2016-17, according to data released by the Central Board of Direct Taxes. While several measures have been announced in the past four budgets for these taxpayers, are they better off today than they were when Prime Minister Modi came to power?

Here’s how taxes changed in the last five years.

Tax Changes In Last Five Years

  • In 2014-15, the threshold for non-taxable income was raised to Rs 2.5 lakh from Rs 2 lakh.
  • Deductions available under Section 80C raised to Rs 1.5 lakh from Rs 1 lakh.
  • Also in 2014, a higher deduction for interest payment on home loans for self-occupied houses to Rs 2 lakh from Rs 1.5 lakh.
  • In 2015-16, the government doubled exemption for transport allowance to Rs 1,600 a month.
  • In 2015, an additional Rs 50,000 deduction for contributions to the National Pension Scheme was provided.
  • In 2017, a rebate of Rs 2,500 for an individual with a taxable income of Rs 3.5 lakh or less was introduced.
  • Additionally, the tax rate on taxable income between Rs 2.5 lakh and Rs 5 lakh was reduced to 5 percent from 10 percent.
  • Surcharge of 10 percent introduced on the tax paid by individuals with annual income of between Rs 50 lakh and Rs 1 crore.
  • In 2018, exemptions for medical expenses and transport worth Rs 34,200 a year were replaced with a standard annual deduction of Rs 40,000.
  • A higher deduction for medical insurance under Section 80D was introduced in 2015 and then in 2018.
  • Standard deduction of Rs 40,000 replaced transport and medical allowance.
  • Long-term capital gains tax on stocks: Budget for 2018-19 brought back LTCG tax on equity—at 10 percent on gains of more Rs 1 lakh made on equity investments held for over a year.

Impact On Salaried Taxpayers

The salaried taxpayers were divided into these categories based on income levels of 2018-19:

  • Low Income: Those earning up to Rs 5 lakh a year.
  • Middle Income: Taxpayers earning Rs 5 lakh to Rs 50 lakh a year.
  • High Income: Those who earn more than Rs 50 lakh.

Also read: Four Years Of Modi: Four Key Tax Trends 

Low Income Group Still Pays No Tax

Assuming an 8 percent annual pay hike, a salaried individual earning Rs 3.5 lakh in 2013-14 would have a gross income of Rs 5 lakh in 2018-19.

This cohort of taxpayers didn’t pay tax in FY14 and don’t pay even now, assuming that:

They take the benefit of Rs 1 lakh relief on interest paid on a home loan or rent paid.

Secure Rs 1 lakh deduction under Section 80C of the Income Tax Act for contribution to provident fund, life insurance premium, etc.

Factoring in the first Rs 2.5 lakh on which there’s no tax and a standard deduction of Rs 40,000 and a tax relief on up to Rs 10,000 interest earned on deposits, taxable income for the category works out to be Rs 10,000. At 5 percent, they pay Rs 500. Even that will be set off against up to Rs 2,500 available for those earning up to Rs 3.5 lakh.

Modi And Your Money: How India’s Salaried Taxpayers Fared

The changes introduced by the government resulted in a direct positive impact on the take-home salary for this group, said Arvind Rao, chartered accountant and certified financial planner. The government also introduced three flagship welfare schemes that in budget 2015 for these individuals, he said.

The schemes—Pradhan Mantri Suraksha Bima Yojana, Atal Pension Yojana and Pradhan Mantri Jeevan Jyoti Bima Yojana—will be particularly useful to those who have no life and health insurance or who are contributing to a pension. While the schemes don’t necessarily safeguard an individual entirely, they form a basic structure, Rao said.

Also read: #BQDebates: What Government Can And Can’t Do In Interim Budget 2019 

Burden Rises For Middle-Income Earners

Middle-income group has been further split into two categories: those with income of Rs 5 lakh to Rs 15 lakh, and Rs 15 lakh and Rs 50 lakh a year.

Rs 5-15 Lakh

Several individuals in this sub-segment gained the most from the government’s tax policy changes in the past five years. Increase in deductions and change in the tax rate on income between Rs 2.5 lakh and Rs 5 lakh substantially reduced the incidence of tax on taxable income up to Rs 5 lakh.

Assuming an 8 percent annual growth in income, a salaried individual earning a little less than Rs 7 lakh annually in 2013-14 would have a gross salary of around Rs 10 lakh in 2018-19.

But the individuals at the higher end of the spectrum in this sub-segment are at a disadvantage because the tax rate on income between Rs 5 lakh and Rs 10 lakh was maintained at 20 percent. An individual with a gross salary of Rs 15 lakh would now pay tax of around Rs 1.1 lakh.

With costs, especially on education and healthcare, increasing dramatically in urban areas, disposable incomes of these individuals fell, according to Rao.

Rs 15-50 Lakh

The government retained the tax on the highest bracket—income above Rs 10 lakh—at 30 percent. So, the tax outgo for these individuals rises substantially with increase in income.

“The marginal earning every year will be taxed at the highest rate, so the net increase in disposable income is very limited,” said Gajendra Kothari, managing director and chief executive officer at Etica Wealth Management. “So, unless they change the tax slabs and raise the threshold at the bottom, this group won’t really benefit.”

Rao said the enhancement of lifestyle and aspiration-led expenditure, too, made the impact more negative as income increased in this segment.

Modi And Your Money: How India’s Salaried Taxpayers Fared

Earlier, an individual could claim unlimited deduction for the interest cost on a house that was not self-occupied. As a result, some savvy taxpayers, during the real estate boom more than a decade ago, bought costly apartments and availed tax benefit, Rao said. In the 2017 budget, this deduction was capped at Rs 2 lakh. That curtailed the deductions that some people with higher income enjoyed.

Also read: Budget 2019: Modi’s Legislative Agenda: Mere Packaging Or A Sincere Effort?

High-Income Group Pays Even More

Rising income levels among top salaried professionals resulted in a significant increase in the number of people earning above Rs 50 lakh a year. Individual taxpayers disclosing income above Rs 1 crore rose 68 percent over 2014-15 to 81,344 in 2016-17, according to the Central Board of Direct Taxes.

While they account for a fraction of the taxpayer base, they contribute the lion’s share to the tax collected. Over the past five years, the Modi government taxed them even more.

In 2015-16, the government replaced the wealth tax with an additional surcharge of 2 percent on those with a taxable income of more than Rs 1 crore. That took the total surcharge levied on these individuals to 12 percent. Then following year, the surcharge was increased to 15 percent.

In the 2017 budget, to compensate for the loss in the government’s income after reducing the tax rate in the lowest taxable slab, Finance Minister Arun Jaitley introduced a 10 percent surcharge on individuals with annual income between Rs 50 lakh and Rs 1 crore.

Modi And Your Money: How India’s Salaried Taxpayers Fared

From the perspective of these individuals, while they can absorb the higher tax, they are worse off now than they were at the beginning of Modi's term, according to Kothari of Etica Wealth Management’s Kothari. “With rising lifestyle, healthcare, and higher education costs, a lot of people in this group, particularly those who are the sole-earning members of a family, will feel the pinch.”