THE POLICY LAB (TPL) - 60
FEBRUARY 10, 2025

By J B Mohapatra

A: IN 1980-81, personal income tax (PIT) yielded 4% of the gross central tax revenue and 23% of direct tax revenue. In 2025-26, PIT is expected to yield 32% of gross central tax revenue and 54% of direct tax revenue. Another data point- PIT alone (un-combined with any other direct tax including corporation tax) garnered more than all components of GST(CGST, UTGST, IGST and compensation cess) in the actuals of 2023-24 or in the revised estimate of 2024-25 and is projected to grow to Rs 13.57 lakh crore against Rs 11.83 lakh crore of GST taken together in BE 25-26. The growing significance of PIT in our tax system as a revenue growth driver could not have been more starkly obvious.

B: Three of the structural issues around which India's PIT growth story have been woven are its (a) liability threshold, (b) the lowest non-zero marginal rate in PIT taxation, and (c) the slab of PIT tax structure beyond which the highest marginal rate applies.

C: In India context, if one were to make an informed trend analysis by telescoping the import of 2 significant legislative improvisations in that analysis (introduction of rebate provisions u/s 87A through Finance Act, 2015 and introduction of a new regime of taxation u/s 115BAC through FA 2020), the essence in few bullet points of the trajectory of PIT taxation policy for the last 45 years- from 1980 to 2025- for PIT should appear as under:

- PIT rates which ranged from 15% to 60% in 1980 are 5% to 30% in FY 25

- Liability threshold has increased from Rs 8,000 in 1980 to Rs 12 lakhs in FY 25

- Lowest non-zero marginal rate has decreased from 15% in 1980 to 5% in FY 25

- Highest slab of PIT which started from Rs 1 lakh in 1980 has increased to Rs 24 lakhs in FY 25

D: Now, PIT in context of Budget 2025.

While it may not be entirely appropriate to compare the old and the new tax regimes of PIT to assess the comparative tax concession or hardship qua each other, since taxpayers under new regime received additional reliefs through increases in entitlement to rebate in 2 successive FA/Finance Bill in 2023 and 2025, and an additional amount by way of standard deduction u/s 16 in Finance Act (No 2), 2024, as against the taxpayers in old regime who incidentally were entitled to neither, statistically speaking five aspects of the overhaul in slabs/ rates of PIT with regard to threshold and top level of PIT proposed in Finance Bill 2025 in the analysis below seen in the context of past 45 years (1980 to 2025) are worthy of note:

One, data on year-on-year increase in threshold level of PIT liability for those years in the last 45 year period, where there have been changes are:

Therefore, the increase in threshold levels of PIT in Finance Bill, 2025 even at 71% increase YoY stands only the 4th among the highest category in the last 45 year period.

Two, increase YoY of the slab for highest taxation in those years where such increases were made:

So clearly, increase in income level for highest taxation rate in Finance Bill, 2025 is not the highest, but stands 3rd in terms of quantum of increase YoY in the last 45 years.

Three, there are only 6 instances in the past 45 year period, where both the threshold tax slab and the slab for highest marginal taxation for PIT underwent a simultaneous increase in the same year: FA 1995, FA 2006, FA 2009, FA 2013, FA 2020 and Finance Bill 2025. Of these 6 years, in pure percentage terms YoY, only FA 2006 did surpass the increases proposed in Finance Bill, 2025.

Four, in absolute terms, year-on-year increase both in threshold (from Rs 7 lakhs to Rs 12 lakhs) and top marginal tax (from Rs 15 lakhs to Rs 24 lakhs) in Finance Bill, 2025 is the highest for each component in the last 45 years.

Five, the rationalisation exercises of PIT by increasing the threshold and highest level of taxation slabs for the 5 years aforesaid which saw simultaneous increases at both fronts did not, except a minor scale slump for one year, yield to a lesser growth of collection through PIT as the results below show:

Projection of a PIT BE of Rs 13.57 lakh crores for FY 25-26 against a RE of Rs 11.99 lakh crores in FY 24-25, despite the steep increases in taxability thresholds, does therefore appear an affirmation of a historical trend.

E: To say that innovation in PIT space cannot go beyond tax rate and tax slab is wholly untrue. Concepts of family, single individual, married and unmarried couple, age and gender are capable of being interwoven and addressed through PIT. Truth to tell, we have not innovated enough in PIT space to explore its possibilities. Below a few examples:

In most OECD countries, individual filing of ITR is the norm, while joint filing is a requirement in few countries. Germany, Iceland, Ireland, Norway, Poland and Spain allow couples to select the filing status. USA allows taxpayers to use the 'married filing jointly' status if they are married and both agree to file a joint return. In India conversely, clubbing of income of the spouse provided in section 64 of the Act is more an anti-abuse provision and less a tax policy for supporting family or parenting.

Gender and age-indexed tax policy tried for some years through rebates u/s 88B and 88C for individuals above 65 years and women below 65 years is no more there since 2005.

Concessional tax slabs and rates for senior and super-senior resident individuals currently available under the old regime do not help senior and super-senior resident individuals if they opt for the new regime, as age-related tax concessions are not integrated into section 115BAC.

E: Growth in PIT revenue in India does indicate effects of endogenous changes within India's economy including a greater formalization of the informal sector, growing strengths of its institutional sub-systems of health, infrastructure, education, communication, trade and commerce etc, and importantly effective tax legislation and better administration of those legislations. The corelation between relative quickness in growth of PIT in India to the overall revenue growth furthermore appears as the case-book model of advanced economies, where PIT as the prime driver of revenue growth came about at the concluding stages of their economic development.

In the context of PIT getting most impactful among the central tax components, more meaningful structural innovations to PIT policy, hitherto less tried, should hold the key in coming years to turn it into a greater growth driver and an engine for the social and economic objects that the government would be seeking to achieve.