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India's middle class will immensely benefit from income tax rate cuts if the government accepts the recommendations of a high-level panel on direct taxation that suggested a four-slab income tax structure. 

The major recommendations of the government constituted panel on the direct tax code (DTC) include an increase in the threshold limit for income tax exemption to Rs 5 lakh per annum from the existing Rs 2.5 lakh limit and a new tax rate of 35 percent for those who earn Rs 2 crore and above, national dailies reported on Tuesday.

The proposals, which are aimed at reducing the complexities of existing tax laws as well as to eliminate surcharges, will have far-reaching implications, mainly on account of higher disposable income with the middle class in the wake of a reduction in the tax rate, which in turn will prop up the consumer demand.

As the Indian economy is headed for its worst recession in almost a decade, the proposed rationalisation of tax slabs will help boost effective demand. According to recent reports, a host of industries ranging from automobiles to fast-moving consumer goods are facing sluggish demand, resulting in massive retrenchment of thousands of workers.

However, an estimate on government revenue loss due to lower tax rates is yet to be conducted.

Proposed Rates

According to the proposal, income tax for those who come under Rs 5 lakh-Rs 10 lakh income bracket has been brought down by half to 10 percent, while the tax rate for those earn an annual income between Rs10 lakh and Rs 20 lakh is proposed at 20 percent. Also, the tax rate for those who come under Rs 20 lakh to Rs 2 crore is at 30 percent, while those who earn more than Rs 2 crore will attract a higher 35 percent tax rate.

Presently, personal income tax for those who earn between Rs 2.5 lakh and Rs 5 lakh is 5 percent, 20 percent for those coming under Rs 5 lakh-Rs 10 lakh tax bracket and 30 percent for an annual income above Rs 10 lakh.

The major changes in the Income Tax Act, which were proposed after more than five-and-a-half decades, were submitted to the union finance minister, Nirmala Sitharaman, last month.

In fact, those who come under less than Rs 5 lakh annual income bracket will be getting a rebate of Rs 12,500 on taxes even this year as per the announcement in the interim budget, which means that there is no tax for income up to Rs 5 lakh.