Government details IR exemption of up to R$5,000 and tax for the richest; see proposal

The proposed Income Tax exemption for taxpayers who earn up to R$5,000 per month will also bring benefits to those who earn up to R$7.5 per month. The correction of the exemption range will benefit 26 million people, according to calculations by the economic team.

The measure, scheduled to come into effect from 2026, is part of the government’s fiscal adjustment package, detailed this Thursday morning (28) by Minister Fernando Haddad, of Finance.

“We are creating a new concept, a minimum income tax, considering the person’s entire income, and considering everything they paid in income tax in that year,” said Haddad.

Currently, the income tax exemption limit is R$2,824, for R$5,000 per month. To offset the fiscal impact, the government will propose a minimum taxation for individuals who receive more than R$50,000.

Of the total number of beneficiaries, 10 million taxpayers will be completely exempt, while 16 million will pay less tax. On the other hand, the creation of a minimum tax of 10% for those earning more than R$50,000 per month should reach around 100,000 people.

The government’s calculations indicate that the correction of the IR table will result in a loss of revenue estimated at R$35 billion per year. However, the introduction of the minimum tax on the richest seeks to balance the fiscal impact of the measure.

For Itaú’s chief economist, Mario Mesquita, the compensation proposed by the government is “potentially sufficient”, but highlights uncertainties, such as the definition of taxable income (for example, whether it includes income from individual microentrepreneurs, pensions and tax-exempt financial instruments , such as LCIs and LCAs).

Read more: Lula’s obsession, income tax exemption of up to R$5,000 could have an impact of R$35 billion to R$40 billion

Who will pay less tax

The model proposed by the government provides:

• Those who earn up to R$5,000 per month: full exemption;
• Anyone earning between R$5,000 and R$7,500 per month: tax credit applied as rebate on tax payable;
• Maintenance of current rules for those earning over R$7,500;
• Health expenses will continue to be fully deductible, including health plans and other expenses;
• Total exemption from income tax for health reasons now applies to those who receive up to R$20,000 per month;

The tax credit was designed to prevent the measure from disproportionately benefiting the richest, as opposed to a simple expansion of the exemption range, which is also seen as more costly to public coffers.

How much do those who earn more than R$50,000 pay?

Currently, even with the nominal rate of up to 27.5%, some high-income taxpayers are able, in practice, to pay less than 10% in effective tax due to deductions and different forms of taxation. With the proposal, anyone who pays an effective rate below this level will need to supplement the difference.

Minimum tax of 10% will be applied to all income receivedincluding profits and dividends, which are currently exempt from taxation. The government considers that this rate will guarantee greater tax fairness and help cover the fiscal impact of expanding the exemption range.

The calculation of the effective rate will take into account all types of income received by the individual, including:

• Income currently taxed exclusively at source;
• Exempt income, such as profits and dividends, which are currently not taxed in Brazil.

Example:

A taxpayer who currently pays a 5% effective rate will need to pay an additional 5 percentage points to reach the minimum 10%.

In other words, if you have an annual income of R$600,000 and paid R$60,000 in income tax, you will no longer have to pay anything. But if you only collected R$30,000, you will have to collect the remaining R$30,000. For those who currently earn an amount like this and already pay more than 10% (for example, R$80,000 in taxes), nothing will change

When does it come into effect?

The changes to Income Tax will be processed in a complementary bill, and should only come into effect in 2026.