Bill Expands Income Tax Exemption

In this article, we will explore the recent approval of the Bill that extends the Income Tax (IR) exemption for people with a monthly income of up to R$1,000,400.

The new legislation not only benefits a greater number of taxpayers, but also brings significant changes to dividend taxation and the income tax table.

Furthermore, we will analyze the financial impacts of this exemption imposed on states and municipalities, as well as the challenges that arise in relation to revenue collection and payroll tax relief for public servants.

Extension of Income Tax Exemption for Income of up to R$1,000

The approval of the new range of Income Tax exemption will bring significant relief to thousands of Brazilians who receive up to R$ 5 thousand monthly.

This change will come into effect in 2026 and aims to reduce the tax burden on middle- and low-income workers, increasing their purchasing power.

With the Income Tax exemption for incomes of up to R$ 5 thousand, a positive impact on consumption and quality of life of these citizens is expected.

Additionally, there will be a partial reduction for those who earn up to R$ 7,350, which will further expand the reach of beneficiaries.

On the other hand, states and municipalities must face financial challenges in the face of revenue losses, as experts point out. in this article in the Chamber of Deputies.

The measure aims to provide tax relief to taxpayers and establish a progressive basis for a fairer tax system.

Impact of the Income Tax Reform

The recent reform to the Income Tax table brings progressive adjustments aimed at benefiting taxpayers with monthly income of up to R$$ 5,000, providing a full exemption and a partial reduction up to R$$ 7,350. Furthermore, the new legislation introduces taxation of dividends for amounts exceeding R$$ 50,000 starting in 2026, which could significantly impact wealth distribution and tax collection.

These changes also raise concerns regarding the financial implications for states and municipalities, since the reduction in income tax collection may affect the transfer of resources from participation funds.

Progressive Structure and Partial Reductions

The progressive structure of new Income Tax table ensures total exemption for income up to R$ 5 thousand, promoting a partial reduction from this value until R$ 7.350.

Increasing tax rates aim to balance income distribution.

The goal is to implement a progressive minimum tax, starting in R$ 50 thousand.

Understand the income ranges and their rates in the table below:

Income Range	Income Tax Rate
Up to R$ 5,000	Total Exemption
R$ 5.001 – R$ 7.350	Partial Reduction
From R$ 50,000	Progressive Minimum Tax

With this approach, it is expected to adjust tax equity, favoring those who earn less while establishing a fairer contribution for higher incomes, in addition to aligning with the new legislation described in Exemption Expansion Project.

Taxation of Dividends and Adjustments from 2026

In 2026, dividend taxation will undergo significant changes.

From that year onwards, any amount received in excess of R$50,000 per month as dividends will be taxed at R$101,000, as detailed in recent reports.

This measure aims to adjust taxation in a fairer and more balanced way, as highlighted in Folha website.

Authorities hope the change will directly impact the financial market, encouraging a more equitable distribution of profits between shareholders and companies.

In parallel, an increase in tax collection is expected for the government, resulting in a strengthening of public accounts and state investment capacity.

• Encouraging the reinvestment of profits in local businesses.
• Increased fiscal predictability for investors.
• Reduced dependence on consumption taxes to balance the books.

Additionally, these changes occur in a context where the government also commits to sending annual proposals to update the Income Tax exemption table, according to information from G1.

This highlights an ongoing effort to improve fiscal equity in the country, ensuring that upper income groups contribute proportionately to national development.

Government's Obligation to Update the Income Tax Table

A government obligation to send a new proposal to update the Income Tax table in up to one year is a crucial component in preserving economic balance.

This measure ensures that inflation adjustments are adequately reflected in taxation, thus avoiding losses in taxpayers' purchasing power.

The need for such an update directly impacts the population, since the renewal of the table prevents the gap from interfering with families' disposable income, promoting a fairer and more equitable tax system.

Fiscal Impact for States and Municipalities

The recent expansion of the Income Tax exemption represents a significant impact on the finances of states and municipalities, which depend on transfers from participation funds to meet their budgetary needs.

With the reduction in income tax revenue, these transfers are compromised, directly affecting the capacity to invest in essential services, such as education and healthcare.

The estimated losses are reflected in the drop in resources available for investments and basic maintenance, generating concern among public managers about the fiscal balance of local administrations.

The lack of adequate revenue requires states and municipalities to seek alternatives to minimize the effects of this reduction.

The resulting financial fragility could force severe budgetary adjustments and investment rescheduling, in addition to negatively impacting the quality of services provided to the population.

You participation funds were seen as a stable source of financing, but given the recent exemptions, their effectiveness in reducing regional inequalities is threatened, which could bring additional challenges to long-term financial planning.

Collection Neutrality and Payroll Tax Exemption

A neutrality of collection It is essential to ensure that states and municipalities do not suffer significant financial losses, compromising the financing of essential public policies.

The recent approval of the Bill that expands the Income Tax exemption has brought to light concerns about the neutrality of collection, since the reduction in income tax collection may result in fewer transfers of participation funds to subnational entities.

This generates budget challenges of these governments, which depend on these funds to maintain essential services to the population.

In short, the expansion of the income tax exemption represents important advances for citizens, but requires careful analysis of its effects on public revenue.