Income tax payers are likely to get a major relief in the Budget as the government prepares itself to please the middle class in the election year.

Finance Minister P Chidambaram can give a marginal but visible relief to personal income tax assessees this year, as tax collections have improved substantially over the past three years, sources said.

With buoyant tax collections in 2007-08, there is significant pressure on Chidambaram to reduce the effective rates. The minister has acknowledged that with better tax compliance, there could be a case for cut in rates.

The income threshold limit for an income tax payer could be raised from Rs 1,10,000 to Rs 1,25,000 or Rs 1,30,000, sources said.

Similarly, the income threshold for 30 per cent tax rate could be raised from the current Rs 2,50,000 per annum, sources said, adding that this had been kept constant since 2005-06.

Tax payers would get a relief of Rs 1,500 to Rs 2,000 even if the finance minister decides to raise the minimum income threshold limit of income tax by Rs 15,000 to Rs 20,000 to offset the impact of inflation and submission of Sixth Pay Commission report later this year.

An announcement on the new income tax code is also expected in the Budget. The finance minister had earlier said that the code, aimed at simplifying the tax laws, would be put for public comments shortly.

Apart from pleasing his party colleagues and voters, the tax relief will also help Chidambaram to address the recent slow down in industrial production.

More income in the pockets of consumers will boost demand for consumer goods as well as household savings for investment.

Another option before the finance minister, the sources said, could be to increase the ceiling limit for savings under section 80C from Rs 1,00,000 to a more reasonable level of Rs 1,25,000.

The increased limit could be specified for investment in infrastructure sector, which requires around $500 billion investment over the next five years.

According to tax consultancy firm KPMG, India needs to realign its income tax slabs to attract more investment.

In neighbouring China, although the maximum marginal tax rate is 45 per cent, it is applicable on income over RMB 1,00,000 per month which translates to Rs 5,47,000 approximately.

China has also said it would lower income tax rates this year to attract more investment.

KPMG also pointed out that the Indian economy has witnessed a year-on-year inflation rate of more than 4 per cent every year in the last three years, which means that effectively the minimum threshold of real income on which the maximum marginal rate sets in is all the much lower.

Another benefit which could be relooked at is the tax sop on interest payable in case of loans taken for purchase of house property.

Presently, interest up to Rs 1,50,000 per annum is allowed as a tax deduction if the property is used for self occupation.