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Higher exemption limits for individuals likely under DTC
June, 21st 2010

Taxpayers could get additional relief under the proposed overhaul of the countrys tax laws, with the finance ministry exploring options to raise the personal income tax threshold to compensate them for high prices.

There is a case for increasing the income tax threshold, a finance ministry official said, adding that high prices were a source of worry for taxpayers.

At present, taxpayers do not have to pay income tax on annual income up to Rs 1,60,000 and the draft direct tax code (DTC) unveiled in August last year had kept this figure intact. But stubbornly high inflation is causing the government to have a rethink and consider amending it in the final DTC.

The proposal, still at an initial stage, involves increasing the income tax threshold by up to Rs 40,000. This could help taxpayers save as much as Rs 4,120 in taxes per year every Rs 10,000 increase in the threshold amounts to a saving of Rs 1,030.

However, the official said the final exemption limit will be based on the governments overall revenue implications, with a decision taken later when the tax slabs are worked out.

Retail inflation, as measured by the consumer price index for industrial workers, was at 13.33% in April. This is significantly higher than wholesale price index inflation, which was at 10.12% in May. Food inflation is running at 16.12%.

The revised draft, released last week, has already given significant reprieve to individual taxpayers by retaining the tax exemption for long-term saving schemes and delinking valuation of perks from market rates. But the finance ministry plans to compensate these revenue giveaways by tightening the liberal tax slabs.

Nothing comes free of cost. The threshold will have to be calibrated with the income-tax slabs and the revenue giveaways, said Kuldip Kumar, executive director at PwC.

The income-tax exemption limit was last revised by finance minister Pranab Mukherjee in Budget 2009-10, although in the last Budget he rewarded taxpayers by re-jigging the tax slabs.

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