The Centre's personal income tax revenue collection averaged 25% in the last four financial years. The robust growth prompted the government to offer tax relief to individuals in this year’s Budget, sacrificing some of the revenue buoyancy.
Halfway through the current financial year, income tax collection from individuals has grown faster than corporate tax revenue collection, although its pace has moderated and its share in overall direct taxes has stabilised. Mint takes a look at its implications for the government’s budget calculations for the current financial year.
Who is paying more, businesses or individuals?
Businesses contributed a larger share of direct tax revenue in FY20 at 53%. After a drop in the pandemic year of FY21, it still accounted for a little more than half of total direct tax revenue in FY22.
However, in the subsequent years, personal income tax revenue collection surpassed corporate tax collections, reaching nearly 55% in FY25, according to data from the Income Tax department.
From 1 April to 12 October, personal income tax collection maintained its position at close to 55% despite the significant tax relief offered to individuals in the budget this year. Notably, its share has not increased from the previous year.
The government had estimated that the tax relief to individuals would cost the exchequer about ?1 trillion this fiscal year.
What is driving personal income tax collection growth?
A host of reasons, including greater formalisation of the economy, higher incomes, greater compliance and the effect of shifting dividend taxation from the corporate entity to the shareholders, effective FY21, have aided the growth in personal income tax collection.
In FY25, individuals with more than ?50 lakh income or who have made capital gains have filed 35% more tax returns (ITR-2) compared to filings in the year-ago period, indicating growing incomes or greater compliance or both among this category of taxpayers.
Similarly, tax returns filed by individuals with income from business or profession (ITR-3) shot up 16% in FY25. In the current financial year, a moderation in tax refunds issued to personal income taxpayers compared to that of the year-ago period, too, has helped in maintaining the revenue growth.
Non-corporate tax receipts, primarily from personal income, grew 10.5% annually, after adjusting for refunds, from 1 April to 12 October to ?6.5 trillion, according to data available from the Income Tax department. ?62,359 crore was issued to individual taxpayers so far this year, compared to ?1.2 trillion issued in the same period last year.
What has been the impact of personal income tax relief on the exchequer?
The government restructured the tax slabs under the new personal income tax regime and raised the rebate available to individuals from ?7 lakh to ?12 lakh, effective this financial year.
The decision was made with a specific focus on the middle class. This, among other factors, has moderated the growth rate of personal income tax revenue from 25% in the four years up to FY25 to 10.48% in the April to October period this year.
However, one trend that was not visible when the Union Budget for FY26 was presented on 1 February was the stabilisation of personal income tax revenue collection in FY25 after years of high growth.
Compared to the 20% growth envisaged for personal income tax collection in the FY25 revised budget estimates, what the government actually managed was a 13.2% growth. This is likely to have implications for the current financial year, as meeting the FY26 personal income tax collection target of ?14.38 trillion would require a 21.5% annual growth, rather than the 14% envisaged in the FY26 Union Budget.
Given that tax relief has already been given to individuals, it will require strong growth in incomes. A shortfall in personal income tax revenue receipts, if not made up for by other sources, could have implications for the fiscal targets in the budget.
What are the positive drivers for personal income tax revenue receipts?
Personal income tax collections grew by about 13% in FY25, slightly below expectations, but strong formal sector employment, digital compliance measures, and a widening tax base show positive signs, said Sandeep Sehgal, partner-tax at AKM Global, a tax and consulting firm.
Achieving the growth target for FY26 will be challenging but possible with continued focus on better data use, timely monitoring of advance tax payments, and coordination between direct and indirect tax systems, said Sehgal.
“Despite recent tax rate cuts and the increase in the income threshold to ?12 lakh under the new tax regime, the government expects the number of taxpayers to rise. This reflects confidence that simplification, digital monitoring, and better compliance will help maintain steady growth in direct tax revenues," said Sehgal.
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