The Budget 2024 is right around the corner, and every taxpayer is waiting with bated breath to see how it will affect his wallet. The budget not only sets the economic tone for the country but also profoundly impacts individual finances. This article explores ways the government could make the new tax regime more attractive for taxpayers.
What is the new tax regime?
The Finance Act 2020 inserted Section 115BAC, with effect from the assessment year 2021-22, to provide for an alternative regime providing for lower tax rates for individuals and Hindu undivided families (HUF). However, an assessee has to forego various exemptions and deductions to claim the benefit of reduced tax rates under this regime. Last year, the Finance Act 2023 extended the scope of this regime to AOP, BOI, and AJP and made it a default tax regime.
Why are taxpayers not switching to the new tax regime?
The new tax regime was designed to simplify tax computation. It came with lower tax rates and new tax slabs but required taxpayers to give up many popular deductions and exemptions. These deductions include premiums paid towards life insurance, home loan principal/interest payments, health insurance premiums and many more.
Although the new tax regime offers lower tax rates, many people found it less beneficial due to the loss of deductions. Thus, despite its higher tax rates, the old tax regime remained popular because it ultimately resulted in a lower tax liability for small taxpayers compared to the new regime. Where an individual is eligible to claim deductions under Section 80C, Section 80D and interest on a housing loan under Section 24(b), the old tax regime is always beneficial for him. Where there is no housing loan but one pays rent, no exemption is allowed under Section 10(13A) for the HRA under the new tax regime. This makes the new tax regime unattractive for many salaried individuals who migrate to metro cities for employment.
Also Read: 7 things Union Budget 2024 can do for salaried taxpayers
How to make the new tax regime popular?
- Introduce deductions
In India, a significant proportion of home purchases are financed through home loans. While exact numbers fluctuate yearly, estimates suggest that around 70-80% of home buyers in urban areas rely on home loans to finance their new houses. A taxpayer with a home loan can avail deductions under Sections 80C and 24(b) for principal repayment and interest payments, leading to substantial tax savings.
Further, considering the high cost of medical treatment, medical insurance is a must-buy for every taxpayer. The deduction of medical insurance premiums is available under Section 80D. Similarly, almost every salaried employee gets from tax savings through the House Rent Allowance (HRA). The new tax regime does not allow these deductions. Therefore, taxpayers cannot simply switch to the new regime without first calculating their tax liability under the old regime.
Accordingly, introducing some common deductions can significantly increase the appeal of the new tax regime. Allowing deductions for HRA, home loan repayment, and medical insurance would make the new tax regime more attractive.
Beyond incorporating existing deductions, the finance minister should introduce new deductions specific to the new tax regime. These could be tailored to modern financial needs and expenses, providing further incentives for taxpayers to transition from the old tax regime to the new tax regime.
- Change in tax slab
A tax slab refers to an income range that attracts a specific tax rate. Under income tax, individual taxpayers are subject to varying tax rates based on their income levels.
The existing basic exemption limit of Rs. 2.5 lakh in the old tax regime has remained unchanged since the Budget 2015. Further, individuals are taxed at a rate of 30% on income exceeding Rs. 10 lakh. Despite hyperinflation, the government still needs to revise these thresholds. It is unlikely that the government will change the tax slabs and rates under the old tax regime because its primary goal is to encourage people to switch to the new tax regime. Therefore, modifying the old tax regime would hinder the government’s objective.
However, changes in slabs or tax rates are possible under the new tax regime. Presently, the basic exemption limit in the new tax regime stands at Rs. 3 lakh, with the highest tax rate of 30% applicable on income exceeding Rs. 15 lakh. Therefore, tax slabs or rate changes under the new tax regime may encourage greater taxpayer participation.
(By Rahul Singh, Senior Manager, Taxmann.com)
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