Pranab Mukherjee set to give you a salary hike - Budget 2011

Finance minister Pranab Mukerjee is set to spring a surprise on personal income-tax payers hurt by a sharp increase in prices. He could lighten the tax burden for those with an annual income of Rs 5 lakh by Rs 7,660 a year to compensate them for the increase in cost of living. The sum saved will be much higher for those with a higher annual income.

The relief is set to come from a rejig in tax slabs, to be aligned with those recommended in the direct taxes code. "The UPA government will partially roll out the direct taxes code in the coming Budget to provide relief to the aam aadmi," said a top government functionary.

The bill has proposed a 10% tax rate for taxable income between Rs 2 lakh and Rs 5 lakh, 20% for income above Rs 5 lakh to Rs 10 lakh and 30% for income above Rs 10 lakh. An individual can also claim a deduction of Rs 1.5 lakh a year, which will be split into two segments. One will be a deduction up to Rs 1 lakh on investments in long-term savings instruments such as Public Provident Fund, new pension schemes and recognised superannuation funds. In addition, a deduction of up to Rs 50,000 will be available on premiums paid for life insurance, medical insurance and tuition fee for children.

The income tax payer will not have to pay an education cess of 3% as well either in the new structure. The tax break of up to Rs 1,50,000 on home loan interest will continue.

So, the tax burden of an individual with an annual income of Rs 5 lakh would work out to Rs 15,000 a year instead of Rs 22,660 now, if he has no housing loan.

Income-tax slabs were last changed in 2010-11. The slabs were widened again to compensate for a higher cost of living and reward the missing middle for better compliance. The government also introduced infrastructure bonds, with a separate ceiling of Rs 20,000 to increase investment avenues for individuals, taking the total tax deduction to Rs 1,20,000. The tax break on infra bonds was meant to be available only for one year.

According to Congress sources another incentive in the Budget could be a package for handloom and power loom weavers in the state. A delegation led by Rahul Gandhi had met Prime Minister Manmohan Singh on Wednesday to seek relief for weavers in the coming Budget.

The Congress general secretary had suggested providing credit cards for weavers on the lines of Kisan Credit Card. Congress leaders said a decision on this front would give immense political mileage for the party in states like Uttar Pradesh.