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The 70-year journey of income tax in India: From a peak of 97.75% to 30%

The acting Finance Minister, Piyush Goyal, would present the interim budget on February 1, 2019 and one of the most keenly awaited announcement would be about any changes in the individual income tax regime. Would the Modi government offer more relief to taxpayers before elections? Will the exemption limit be raised from Rs 2.5 lakh to Rs 3 lakh or even Rs 5 lakh? Will there be changes in rate of income tax across slabs?

Even as we await these announcements, we can study how the Indian government has taxed individual incomes since independence -- What the tax slabs have been and the rate at which tax has been collected. We take a look:

FY 1947-48

In the first year in independent India, (FY 1947-48), no income tax was payable on earned income that did not exceed Rs 2,500 (before deduction of allowance, if any). There were five slabs that helped assess the income tax that an individual needed to pay. In 1947, India had the anna as a currency unit. The Rupee was divided in 16 Annas. One Anna was equal to 4 paisa or 12 pies, which means one rupee was equal to 16 annas or 64 paisa or 192 pies. 

Income tax slab Tax rate
Rs 0 to 1,500  No Income Tax
Rs 1,501 to 5,000  One Anna in the Rupee (6.3%)
Rs 5,001 to 10,000 Two Annas in the Rupee (12.5%)
Rs 10,001 to 15,000 Three and half Annas in the Rupee (21.88%)
Rs 15,001 and above Five Annas in the Rupee (31.25 %)

Thus in FY 1947-48, the highest marginal rate of income tax was 31.25% for income of Rs 15,001 and above.

FY 1949-50

The budget for FY 1949-50 saw the rates being lowered for income up to Rs 10,000 even as tax rates were  retained for the higher slabs. At the same time, the exemption limit was raised to Rs 3,000. However, someone who earned anything above that, even Rs 3,001, would have to pay tax in accordance with the slabs shown in the table below.

Income tax slab Tax rate
Rs 0 to 1,500  No Income Tax
Rs 1,501 to 5,000  Nine Pies in the Rupee (4.69%) 
Rs 5,001 to 10,000 One Anna and Nine Pies in the Rupee (10.94%)
Rs 10,001 to 15,000 Three and Half Annas in the Rupee (21.88%)
Rs 15,001 and above Five Annas in the Rupee (31.25%)

While minor tinkering continued in tax rates over the next few years, a change was introduced in FY 1955-56 when a distinction was made between married and unmarried tax payers. For married tax payers, no income tax was applicable on income up to Rs 2,000 while for unmarried tax payers, no tax was payable on income up to Rs 1,000. There were six slabs in all for both categories.

India decimalised its currency in 1957 and from Budget-FY 1958-59 onwards this was reflected in the income tax slabs as well with percentages being given for each slab. However, things were made more complicated as the budget sought to create a distinction between a married tax payer with child and a married tax payer who didn't have to support a child. For the unmarried tax payer, the highest marginal tax rate was 25 per cent while for the married tax payer (with income less than Rs 20,000) it was 18 per cent. There was also a higher number of slabs (seven). Another major change made during the 1950s was the introduction of the surcharge on income tax paid.

FY 1965-66

Major changes were introduced in personal income tax slabs in FY 1965-66 when Finance Minister T T Krishnamachari overhauled the tax rates across various slabs. This budget ended the distinction between married or unmarried tax payers and the increased tax rates in the higher slabs. Marginal tax rates went as high as 65 per cent. This was followed by surcharge between 20 per cent and 25 per cent. The finance minister tried to explain that this represented a minor reduction in tax at all levels of income.

FY 1974-75

By FY 1973-74, the highest marginal tax rate (for the highest slab) had gone up to 85 per cent. Combined with surcharge, the maximum marginal rate of income tax went up to 97.75 per cent. In FY 1974-75, Finance Minister, Y B Chavan reduced the rate for income tax in the higher slabs with an upper limit of 70 per cent. Combined with surcharge it became 75 per cent, still at high levels but a vast improvement over the previous years.

FY 1985-86

In the first full budget of the Rajiv Gandhi government, Finance Minister, V P Singh ushered in major changes to the personal tax regime when in his budget speech he announced a reduction in the number of slabs and also brought down the rate of income tax substantially. The budget also saw surcharge being abolished. The highest marginal tax rate was brought down to 50% in this budget marking a major change in tax philosophy.

Income tax slab Tax rate
Rs 0 to 18,000 Nil
Rs 18,001 to 25,000 25%
Rs 25,001 to 50,000 30%
Rs 50,001 to 100,000 40%
Rs 100,001 and above 50%

FY 1992-83

Finance Minister, Manmohan Singh further streamlined the income tax structure when the number of slabs was reduced to three and fixed the tax rates at 20 per cent, 30 per cent and 40 per cent. The exemption limits were raised as well with no income tax payable on income up to Rs 30,000.

FY 1997-98

While the number of slabs was reduced earlier in the 1990s, the rates also saw further revision in the Budget for FY 1997-98, when Finance Minister, P Chidambaram reduced these to 10 per cent, 20 per cent and 30 per cent. This budget also saw changes being made to tax brackets and standard deduction, which was raised to Rs 20,000

FY 2005-06

The next major change in the income tax regime took place in 2005 when Finance Minister, P Chidambaram made substantial changes to the slabs. The FM announced that no tax was to be paid on income up to Rs 1 lakh. This gave much relief to the individual tax payer as slabs were revised. The highest marginal rate of tax was 30% for income above Rs 2.5 lakh.

FY 2010-11

This budget granted even more relief to the tax payer when tax slabs were changed by FM, Pranab Mukherjee. Exemption limit was raised to Rs 1.6 lakh while a 10 per cent tax was to be levied on income between Rs 1.6 lakh and Rs 5 lakh. A 20 per cent tax rate was applicable on the slab between Rs 5 lakh and Rs 10 lakh.

FY 2014-15

After being sworn in, FM Arun Jaitley increased the exemption limit for individual tax payers to Rs 2.5 lakh from Rs 2 lakh. 

FY 2017-18

In his budget speech in the parliament on February 1, 2017, Finance Minister Arun Jaitley brought down the rate at which tax was to be collected on income between Rs 2.5 lakh to Rs 5 lakh to 5 per cent from 10 per cent earlier. 

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