Individual tax-payers will now have more money to save or splurge

Sanket Dhanorkar 
and Pratibha Kamath

Revised income-tax slabs to increase disposable

incomes; consumers, who have been feeling the 

pinch of rising prices, now have something to cheer about.

Amidst all the debate about fiscal consolidation and roll-back 

of excise duty concessions, the finance minister has created

quite a flutter in an unexpected area. 

The Union Budget for 2010-11 has provided 

individual taxpayers with some welcome revisions

in tax slabs that would effectively put more money 

into their wallets. Consumers, who have been feeling 

the pinch of rising prices, now have something to cheer about.

The revised tax slabs will be as under:

Income upto Rs 1.6 lakh	Nil
Income above Rs 1.6 lakh and upto Rs. 5 lakh	10 per cent
Income above Rs. 5 lakh and upto Rs. 8 lakh	20 per cent
Income above Rs. 8 lakh	30 per cent

                                           
While the primary threshold (amount up to which no tax is payable) 

remains unchanged at Rs1.6 lakh, the income bracket falling under

the 10% tax slab has been revised to Rs1.6 lakh-Rs5 lakh. 

Previously, this bracket was fixed between Rs1.6 lakh-Rs3 lakh.

Similarly, the second slab of 20% tax has been fixed at Rs5 lakh-Rs8 lakh 

(from Rs3 lakh-Rs5 lakh earlier). The highest tax slab of 30% will now 

be charged on income in excess of Rs8 lakh, compared to Rs5 lakh earlier.

This dramatic shift in the direct tax policy means a savings

bonanza for the inflation-hit consumer.

Here is how your savings will shape up under the new tax system:
Suppose you earn an annual income of Rs4lakh,

your tax incidence (excluding education cess) will now 

amount to Rs24,000, instead of Rs34,000 earlier—a saving of Rs10,000.

A person earning Rs6 lakh will shell out Rs54,000 in taxes. 

In this case, the savings compared to the earlier tax 

code will amount to a whopping Rs30,000.
Similarly, a person in the highest tax slab, earning say, Rs9 lakh, 

will be able to save a phenomenal Rs50,000 from the tax differential.

This is not the only carrot extended by the government, either. 

The existing tax-saving limit of Rs1 lakh has also

been raised by an additional amount of Rs. 20,000 for

investment in long-term infrastructure bonds.

Industry experts have welcomed the move. Ranjeet Mudholkar,

principal advisor, Financial Planning Standards Board India, 

said, “The further slackening of income-tax slabs will benefit 60% of tax-payers. 

Apart from these, a tax payer can also avail deduction of Rs20,000 for

investment in infrastructure bonds as notified by the Government, 

in addition to the limit of Rs1 lakh under Section 80C. 

Hence, from the perspective of financial planning, a tax-payer

can channelize more funds towards their chosen financial 

goals despite earning the same income.

Also, to optimise the use of excess disposable 

income, a tax-payer should employ strategic asset

allocation towards better asset-creation in future.”

Nikhil Bhatia, executive director at PricewaterhouseCoopers 

believes this is an indication of how the slab rates will move from 

here onwards. “I think it is a step in the right direction.

Under the direct tax code (DTC), the tax slab rates are 

expected to go up substantially. In that sense, it is not much 

of a surprise because an indication of this was coming through 

from the DTC itself, where the marginal tax rate has been 

proposed at Rs25 lakh. It is a populist move; one which 

will leave more money in the hands of the individual”, he said.

Dr Suresh Surana, founder, RSM Astute Consulting Group, 

agreed, “The finance minister has attempted to take the tax-payer

on the road to the new Direct Tax Code (DTC) (proposed

to become effective from 1 April 2011), by bringing the income-tax

slab rates in sync with those proposed in the DTC.”

Contributions to the Central Government Health Scheme

have also been allowed as deductions within the overall 

ceiling for tax rebate, besides contributions to health insurance

schemes which are currently allowed as deductions under the Income Tax Act.

The proposals on direct taxes are estimated to result in a

revenue loss of Rs26,000 crore for the government.