The new tax regime has been made far more attractive with the Budget introducing several key changes, including a bigger rebate, introduction of standard deduction for pensioners and salaried taxpayers, and an increase in the exemption limit.
In a move to simplify the structure, the number of slabs has been cut from six to five.
What may push individuals to opt for the new regime is the chunky rebate; from Rs 5 lakh this has been raised to Rs 7 lakh under Section 87 of the I-T Act. The exemption limit has been raised to Rs 3 lakh from the existing Rs 2.5 lakh. The tax rate for incomes between Rs 3 lakh and Rs 6 lakh is just 5%. The highest tax rate of 30% kicks in only for incomes of Rs 30 lakh and above.
A back of the envelope calculation shows the new regime could turn out to be better if a person’s salary is more than `15 lakh and the deductions are less than Rs 4.25 lakh. As Surabhi Marwah, tax partner, EY India, pointed out, if the deductions amount to more than Rs 4.25 lakh, and the income is more than Rs 15 lakh and less than Rs 5 crore, it would make sense to stick to the existing regime.
“The changes in the new tax regime are likely to increase its adoption, specifically for people with a salary income of up to Rs 7.5 lakh, as the tax outflow will be nil following the much higher limit for rebate coupled with the standard deduction,” Marwah said.
For an income of over Rs 5 crore, the surcharge would be limited to 25%, so that calculation would need to be made on a case by case basis.
At the same time, the deductions available to individuals are numerous. For instance, a deduction of Rs 1.5 lakh per annum is available under Section 80C for contributions to EPF, PPF and so on, a deduction of Rs 50,000 can be got on the New Pension Scheme, Rs 25,000 is available on health insurance premiums under Section 80D, and Rs 2 lakh per annum on the interest on a home loan. These add up to a sizeable amount of `5 lakh, including the standard deduction of Rs 50,000.
Given the problems of filing tax returns, assesses may be willing to switch to the new regime if there is only a small saving from staying with the existing regime. For the government, the exemptions often result in a leakage, which is why finance minister Nirmala Sitharaman has been trying to coax individuals to move to the new regime.