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Will Middle Income Salaried Class Benefit From Union Budget 2020? Research Team | Posted On Thursday, January 16,2020, 03:24 PM

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Will Middle Income Salaried Class Benefit From Union Budget 2020?



The middle class is waiting with eager anticipation and is closely watching the Union Budget 2020. The middle class in India faces the bulk of the tax burden in India. Take a look at this statistic. Out of the 5.52 Crore taxpayers in India, a whopping 27% had income between Rs 5 Lakhs to Rs 10 Lakhs. With CPI inflation hitting 7.35% in December 2019, the middle class is desperately seeking relief.

Currently, the basic tax exemption limit is Rs 2.5 Lakhs a year. It’s Rs 3 Lakhs a year for senior citizens. If you earn income less than Rs 2,50,000 a year (This is male/female under 60 years), there is no income tax. Its Rs 3 Lakhs a year for a senior citizen between 60-80 years of age and Rs 5 Lakhs for a super-senior citizen.

If you earn between Rs 2.5 Lakhs to Rs 5 Lakhs, you pay income tax at the rate of 5%. (This is income tax at the rate of 5% for senior citizens between 60-80 years of age who earn between Rs 3 Lakhs and Rs 5 Lakhs). If you earn between Rs 5 Lakhs to Rs 10 Lakhs a year, you pay income tax at the rate of 20%. It’s an income tax rate of 30% on having an income above Rs 10 Lakhs.

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Will Middle Income Salaried Class Benefit from Union Budget 2020?

Let’s take a look at the income tax slabs in India. This should give a better idea of how much tax people pay in India.

See Also: Last Minute Tax Planning: What You Should Do?

Income Tax Slabs (Income Tax Rules For FY 2019-20)

Income Tax Slab For Individuals (Less than 60 years):

What Does the Middle Class Want From the Union Budget 2020-2021?

The middle-income salaried class wants the Finance Minister to reduce the income tax rates for the income tax slabs between Rs 5 lakhs to Rs 10 Lakhs from 20% to 10%. This will result in a huge tax saving for the middle class. Let’s understand this with an example.

Suresh earns Rs 10 Lakhs a year. He is 35 years and stays in a rented apartment in Kolkata. He gets an HRA as part of his package of Rs 2.75 Lakhs. He invests in PPF and NSC and makes use of the Section 80C limit up to Rs 1.5 Lakhs a year. He has availed a health insurance plan for self + family and father (Father is 52 years old) and gets a deduction of Rs 50,000 a year. He also pays a rent of Rs 2,40,000 a year for the rented apartment. What is the income tax Suresh pays?

See Also: All You Must Know About Tax Planning

Suresh has a basic income of Rs 4.5 Lakhs. (This is 50% of Rs 9 Lakhs).

He has a HRA of Rs 2.75 Lakhs.

He uses Section 80C tax deduction up to Rs 1.5 Lakhs a year and Section 80D tax deduction up to Rs 50,000 a year.

Using IndianMoney Income Tax Calculator you will find that Suresh pays a tax of Rs 24,440.

Now let’s say the Finance Minister reduces the income tax rate from 20% to 10% for the Rs 5 Lakhs to Rs 10 Lakh income tax slab. You find the income tax payable reducing to Rs 18,720. You end up saving Rs 24,440 – Rs 18,720 = Rs 5,720 in taxes.

See Also: What are the Steps Involved in Tax Planning?

Why Does the Middle Income Salaried Person Seek an Income Tax Rate Cut?

Just take a look at CPI inflation for December 2019. It came at 7.35%. The CPI inflation was 5.54% in November 2019. Let’s assume that the average CPI Inflation was 6%. Now, a middle-class person invests in an FD which gives 7% interest a year. Take a look at the real rate of return:

Real Rate of Return = 1 + Nominal Rate / 1 + inflation rate  - 1.

Real Rate of Return = 1+0.07 / 1+ 0.06  - 1

= 0.094%. 

Even though you invest in an FD which gives 7%, the real rate of return is just 0.094%. Don’t you think the middle class needs the income tax rate cut?

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