“You will have to quit your corporate job and become an entrepreneur to understand the tax benefits, – my friend said a while ago. He was spot on. Before we begin, I would like to point out that I am a layman. I strongly believe in paying taxes for the good of the country. This article presents my view on how the tax burden on the salaried can be reduced from a governance perspective (i.e., without overtly reducing overall government IT revenue).
This is NOT a whinge post. I am also acutely aware that my views are of limited practical use, and the problem mentioned is not easy to solve. If you have constructive comments that make economic sense, do share them with us. We will be happy to publish them (anonymously if you wish).
For the current FY (2025-2026), a salaried person choosing the new tax regime has to pay tax on any income above Rs. 12.75 lakhs: a salary of Rs. 12 lakhs plus a standard deduction of Rs. 75,000.
If the employer offers to contribute to the NPS, then the tax-free limit would be a net salary of Rs. 12 Lakhs (after deducting the NPS employer contribution). For a government employer, this NPS contribution is separate from salary.
For corporate employees, the only way to get this benefit is to reduce their allowances. Which, at least in the context of this article, is not a true benefit. Corporate employees have to reduce their in-hand salary to lower their tax burden.
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That is, “In the private sector, the ‘Employer Contribution’ is usually part of the fixed CTC (Cost to Company). Therefore, to get this tax benefit, the employee must agree to reduce their monthly take-home cash to fund the ’employer’s’ share. It is a tax-saving tool, not ‘extra’ money.
For a small business owner paying tax under the presumptive income section 44AD of the Income Tax Act (hold on to your chairs), a gross digital income of Rs. 200 Lakhs is tax-free! Why? Assuming their entire income is digital, they only need to pay tax on 6% of the gross income – 6% of 200 = 12 lakhs, which is entirely tax-free (new tax regime, current FY)
The section 44AD limit applies to gross income up to Rs. 3 Crores, provided cash receipts are less than 5% of total turnover.
For a professional paying tax under the presumptive income section 44ADA of the Income Tax Act, a gross income of Rs. 24 lakhs is tax-free. Why? They only need to pay tax on 50% of the gross income, and that Rs. 12 lakhs, which is entirely tax-free (new tax regime, current FY)
The section 44ADA limit applies up to Rs. 75 Lakhs, provided cash receipts are less than 5% of total turnover.
While salaried employees are audited under TDS, assessees under sections 44AD/ADA are exempt from maintaining a book of accounts. Small additional income above the tax-free limit is also higher for the salaried.
Yes, this is a huge disparity (aka horizontal inequality). Yes, small business owners, entreprenuers and professionals with uncertain income and significant overheads should be given tax benefits. Yes, the TDS route offers a reliable revenue stream for the government.
These problems exist in most countries with a non-zero income tax.
The question is, can the tax burden on the salaried be lowered without reducing revenue? Can this gap between salaried and entrepreneurs be reduced without increasing the tax burden on the latter?
Can we allow the salaried to deduct expenses (at least those with a digital record)? This is done by many countries. Can the standard deduction (which serves as a proxy for expenses) be increased to narrow this gap?
The standard deduction is a fixed amount, while presumptive taxation is a percentage. Can the standard deduction also be made into a percentage?
Can we adopt a uniform tax regime where everyone pays a fixed rate (say 20%), with allowances for non-salaried workers?
Can we tighten the presumptive income rules? That is, clarify who can opt for presumptive taxation and who cannot. For example, overheads differ between physical stores and online businesses, doctors and tech consultants.
As a layman, I feel the only way to eliminate this gap is to abolish income tax. Which is not practical. Adding additional tax on online transactions or goods and services, and then proportionately lower tax on the salaried, also does not seem practical.
Increasing tax via presumptive channels and proportionately lowering the salaried tax burden seem viable, but they may lead to lower compliance among the non-salaried and lower revenue.
Keeping presumptive tax norms intact (without further relaxation) and progressively lowering tax slabs (as governments have done) seems the only practical way forward.
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