It is clear now that the new tax regime, which came into effect from April 1, 2020, has failed to take off due to low interest of taxpayers. The new tax regime introduced a moderate tax rate without exemptions. Therefore, more individual salaried taxpayers have opted for the old tax regime in the last two years rather than shifting to the new one.
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The old tax regime in India was based on the slab-rate system, where individuals were taxed based on their income levels. The new tax regime, introduced in Budget 2020, offers a choice between the old tax regime and the new tax regime, with lower tax rates but with fewer exemptions and deductions.
Most Indian taxpayers pay rent, repay home loans, save money in provident fund (PF) etc. They also pay life and health insurance premiums. They hardly find the new tax regime beneficial. In fact, the tax is higher if they choose the new tax regime as compared to the old tax system.
“In the new tax regime, salaried people for instance are not entitled to major benefits like Standard Deduction, HRA, and LTA, among others. Retired senior citizens will not be able to claim standard deduction in respect of pension from ex employer as well as deduction in respect of interest from post office and banks u/s 80TTB if they opt for new regime. Moreover, various deductions under Chapter VIA such as deductions under Section 80C (comprised of various items like EPF, LIP, School Fee, PPF, NSC, ELSS, home loan repayment etc.), 80 CCD(1) & 80 CCD(1B) (for NPS), 80D (for health insurance premiums), 80G for donations, 80TTA for interest on saving bank account etc are also not available for taxpayers,” says tax and investment expert Balwant Jain.
Adhil Shetty, CEO, Bankbazaar.com, explains, “If taxpayers still opt for the old regime, it’s because the new regime isn’t providing them the necessary tax savings on home loans, provident fund, insurance, rent, health expenses, school fees etc. After these deductions, taxpayers have been able to calculate for themselves that the old regime is better. If the new regime has to be more attractive, its tax exemptions and brackets need to be enhanced to the point where it becomes the better option of the two.”
Either way, enhancements in tax brackets is the way forward for both regimes. “It’s also necessary to account for inflation. With the old regime, the 20% slab needs to be expanded to Rs 7.5 lakh to Rs 15 lakh, and this is just inflation adjustment and nothing else. The 30% slab needs to be apply to income above Rs 15 lakh,” adds Shetty.
According to tax experts, two years back Section 115BAC was introduced as an alternative to the current complex tax regime. In this regime, an individual or HUF gets 7 slabs of tax rates and the highest slab rate of 30% is triggered when the taxable income exceeds Rs 15 lakh.
In comparison to this, in the existing regime, there are 4 slab rates and the highest tax rate of 30% applies when the taxable income exceeds Rs 10 lakh.
“Despite this the new regime could not attract many taxpayers because many exemptions and deductions are not allowed in the new regime. All common deductions like interest on housing loan, standard deduction, exemption for HRA and LTA, deduction for life insurance, medical insurance are not available. If an individual is eligible to claim just 3 benefits – standard deduction, Section 80C and Section 80D benefits – the old regime will have lesser taxes. Because of these reasons the new regime has lesser takers and possibly most of them are non-residents,” informs Naveen Wadhwa, DGM, Taxmann.
In the Budget 2023, therefore, the government should focus on making it more attractive either by reducing the tax rates or increasing the last slab of 30% after Rs 20 lakh. Further, at least three deductions should be allowed in this regime — Standard deduction of Rs 50,000, Section 80C and Section 80D deductions.