The analysis of the recent Income Tax Returns data (FY24, CBDT) reveals that post-pandemic recovery in annual earnings of individuals has been muted. At Rs. 8.2 lakh (individuals plus HUF), it slowed to 4.5% in FY24, averaging at 5.8% on a 5-year CAGR, which is barely enough to match inflation.
The core income (salary, business income, and other income ex-capital gains), which accounts for 95% of the total income, grew by 5.7% in FY24 and averaged 5.4% over the past 5 years. Thus, while the income growth from capital gains has been the highest, it had little impact on the average household income. Accounting for just 5% of the average income, capital gains contracted by 18% in FY24 after a huge 80% in the previous year.
A broad-based decline was also seen in various sources of income. Business incomes (27% of total) plummeted to 2% in FY24, averaging 5.5% over 5 years (4.7% in 10 years). Salary income (57% of total) decelerated to 8.2% in FY24 from 11.9% in FY23, averaging 5.2% (6.5% in 10 years). The contribution of other incomes has also declined over the years due to the slowdown in household savings and the decline in interest rates of deposits and other assets.
In real terms, the income of people employed in the formal sector remained stagnant for over a decade and declined during the past 5 years (-0.3% CAGR). The real average income contracted by 0.9% YoY in FY24.
But contrasting the modest growth in average income assessed, the total assessed salaries expanded remarkably, 19.1% in FY24, and averaged at 15.5% over a decade following the 11.9% in the initial 5 years. What’s more, income tax collection in FY24 grew even faster at 25% (Rs. 10.1 lakh crore) with a 5- and 10-year average of 17% and 15.6% respectively.
Hence a big emerging picture is that the total income tax revenue collection is growing due to higher total income assessed amidst deceleration in average income of ITR filers.
Also Read: Budget 2024-25: Income Tax Contributes More to Govt Revenue Than Corporations
On combining the 21 subcategories of the reported salary income into three groups i.e up to Rs. 9.5 lakh (contributing to 38.6% of total income assessed), Rs. 9.5-50 lakh (47.9%) and above Rs. 50 lakh (13.5%), the key trend that emerges from the analysis is that the average salary of the upper end has declined while the average salaries across lower and mid categories have grown modestly.
However, the number of assessees has grown rapidly in the top segment (33.9% 2-year CAGR) followed by the mid-segment (25.6%) and bottom segment (5.7%). As a result, total income for the top segment grew by 32.3% (2-year CAGR), 27.4% for the mid-segment and 8.9% for the bottom segment.
Reading the slowing average income levels along with higher number of income tax assesses indicates that robust income tax collection is due to increased tax compliance, specially coming from the mid segment (Rs. 9.5- 50 lakh).
These trends also signal a rise in effective tax rates, greater compliance in the higher income bracket and a significant rise in income inequality. There is a deviation of 47% from the perfect equality situation in FY24 (Gini Coefficient of 0.47) compared to 45.8% in FY22. Importantly, the share of the bottom 40% of salary earners declined from 15.5% in FY19 to 13.6% in FY24. And the share of the top 20% increased from 44.7% to 50.0%. The post-COVID skewed rise in salary and compensation came largely from select sectors like IT and BFSI, which is beginning to normalise now.
The stupendous rise of the income tax collection at Rs. 3.9 lakh crore in FY25 (April-July) by 53.4% YoY has led to the growth of gross tax collection by 21% YoY at Rs. 10.8 lakh crore. Contrastingly, corporate income tax revenue has risen by a modest 4.8% (Rs. 1.8 lakh crore YTD) which is 54% lower than income tax collection. This anomaly is largely attributable to lower income tax and higher corporate tax refunds compared to last year.
The overall improvement in fiscal deficit in FY25 at Rs. 2.7 lakh crore (April-July), down 54% YoY, is a cumulative impact of a) oversized dividend payout by the RBI (Rs. 2.1 lakh crore), b) lower tax refunds to IT payers, and c) curtailment in total spending; at Rs. 13 lakh crore it is down 5.8% YoY, with capital expenditure declining by 18% (Rs. 2.6 lakh crore).
Looking ahead, the risk to income tax collection would arise from a) deceleration in compensation growth across companies to 6.3% YoY in 1QFY25 from 12.1% in 1QFY24, b) the convergence of compensation growth across sectors as the skew normalises, and c) convergence to the lower average income growth.
Since there are considerable one-off factors, a reduction in net indirect tax incidence and receding initial buoyancy in direct taxes will likely intensify the fiscal knot. This will likely accentuate the trade-off between revenue and capital spending. Amid the need to address the household sector fragility, and its political imperative, the contraction in capital allocation may likely intensify.
Dhananjay Sinha is co-head of Equities and head of Research of Strategy and Economics at Systematix Group.
