Finance minister cuts tax burden with wider slabs

Finance minister Pranab Mukherjee had a few goodies in store for taxpayers this time. “The FM brought cheer to individual taxpayers by widening the tax slabs, thereby reducing the tax burden,” says chartered accountant Suresh Surana, founder of the RSM Astute Group. As per the new rules, a tax of 10% will be charged within the slab of Rs1.6 lakh to Rs5 lakh, a tax of 20% will be charged within the slab of Rs5 lakh to Rs8 lakh, and a tax of 30% will be charged for any income above that.

“This widening in tax slabs is expected to bring relief to 60% of taxpayers,” says Ranjeet Mudholkar, principal adviser, Financial Planning Standards Board of India. Those with a taxable income of up to Rs3 lakh will continue to pay the same tax, but individuals with taxable income more than that will benefit.“A male taxpayer with a net taxable income of Rs5 lakh is slated to save on income tax to the extent of Rs20,600 over the previous year. A taxable income of Rs8 lakh and above would get benefit in tax savings of Rs51,500,” adds Mudholkar.

This widening of the tax slabs is in line with the new direct tax code, which is expected to replace the Income Tax Act, 1961, from April 1, 2011. Under the new code, tax rates will be 10% for incomes from Rs1.6 lakh to Rs10 lakh, 20% for incomes up to Rs25 lakh, and 30% for earnings above Rs25 lakh per annum.
The contrarian view here is that the extra money will come in handy with prices expected to go up. “There will be general increase in prices of all manufactured goods because of increase in excise duty on goods as well as petrol and diesel. So one hand gives while the other takes it away, but for most people it should be net positive,” says GV Nageswara Rao, managing director and chief executive officer, IDBI Fortis Life Insurance Company Ltd.

Over and above this, the finance minister has introduced a new tax-saving avenue of long-term infrastructure bonds. Clause 24 of the annual finance bill seeks to insert a new section, 80CCF, in the Income tax Act relating to deduction in respect of subscription to long-term infrastructure bonds. “The FM has also increased the limit of deduction available by allowing an additional investment of Rs20,000 for infrastructure bonds,” says Surana. “Thus the total limit has increased from the current Rs1 lakh to Rs1.2 lakh.”

Currently, Rs1 lakh is available as tax deduction for investments made under tax-saving instruments like Public Provident Fund, life insurance, tax-saving mutual funds, etc.