The exemption limit was likely to be raised by about Rs 25,000 to Rs 40,000 in Budget 2008-09, sources close to the development said. This would mean that, instead of having to pay income tax when ones annual salary touches Rs 1,10,000, the threshold would be Rs 1,35,000. An increase in the exemption limit by Rs 10,000 translates into savings of about Rs 1,000 for every tax payers. The tax break would cost the government about Rs 1,500 crore.

Sources said, income tax rates for individual and corporate taxpayers were unlikely to be re-jigged once the limit was raised. With the buoyancy in direct tax revenue, we felt that some relief can be given to taxpayers. Otherwise, the rates for the taxpayers are unlikely to see any change, a government official said.

Tax collection has registered growth of over 40% this fiscal to touch Rs 1,64,407 crore until December 15. The finance ministry expects the direct tax collection to cross Rs 3,00,000 crore this fiscal. With expectations that this trend of plenty will continue in the next fiscal as well, the ministry feels that providing reprieve to taxpayers is a good idea.

In Budget 2007-08, the government had raised the exemption limit by Rs 10,000 to Rs 1,10,000. Finance minister P Chidambaram had said the measure was aimed at rewarding taxpayers for the increase in receipts.

The coming Budget just might be the last full Budget for the UPA government. The general elections are slated for 2009. Re-setting of the income tax structure is a popular measure, and the demand for this is likely to be intense this time around. The Sixth Pay Commission will push up the tax bracket of all government employees and so, the move to raise the limit is expected to keep their tax liabilities fairly neutral. The proposal is also a part of the carrot-and-stick policy by the finance ministry, which plans to provide this relief to tax payers and at the same time focus on greater compliance.

Currently, people in the slab of Rs 1,10,000-Rs 1,50,000 pay income tax at a rate of 10% on their earnings.

Income between Rs 1,50,001 and Rs 2,50,000 attracts 20% tax, while those earning above pay 30%. This excludes the education cess of 3% on the applicable rates.