The government is likely to withdraw the exemption-free personal income tax (PIT) regime introduced in FY21 as an option for taxpayers, as it has been a “non-starter” despite the comparatively lower tax rates offered, a top official told FE. To serve the purpose of minimising exemptions, however, it may tweak the older regime that a vast majority of the taxpayers continues to opt for, the official added.
The slabs could be rejigged to ensure that the tax liability on most taxpayers will reduce, and more meaningfully for those in the lower tax brackets, the official said, as preparations for the Budget FY24 are underway in the finance ministry.
“In the exemption-free regime, tax is payable on income above Rs 2.5 lakh whereas no tax is payable for income up to `5 lakh in the older scheme if exemptions are availed of. This may be one reason why taxpayers have stuck to the older regime,” the official said. About 75% of annual income tax returns are for annual income below `5 lakh, he noted.
Less than 1% of the taxpayers who filed returns through the Clear (previously ClearTax) portal this year have opted for the exemption-free regime.
“The government should come out with something interesting such as removing exemptions and rationalising slabs to ensure everyone gets some relief. By doing so, it will also get more revenues due to higher compliance,” the official said.
In the older tax regime, the tax rate moves rather steeply from 5% for income of Rs 2.5-5 lakh to 20% for `5-10 lakh and 30% for above Rs 15 lakh. “It does not make sense to jump from 5% to 20%,” the official added.
Given that the Budget for FY24 will be the last full Budget of the current government before the general elections in April-May 2024, it will take a call on the matter after much careful consideration, analysts reckon.
Sonu Iyer, partner at EY India, said: “It may be simpler for the government to make the tax regime fit for the purpose (of minimising exemptions and making the rate benign) by retaining a few reliefs such as exemptions for pension contributions (Section 80C, 80CCD etc), medical insurance and standard deduction. Slabs may be reworked to bring `5-10 lakh income under 15% rate, Rs 10-15 lakh under 20% and above `15 lakh at under 30%.”
The high growth in direct tax collections may give the government the headroom to rejig the personal income tax regime. Direct tax collections (post-refunds), which were about `9.47 trillion in FY21, may reach about `18 trillion in FY23, clocking a growth of nearly 90% in two years.
This was helped by the greater formalisation of the economy after Covid-19 broke out in 2020, and improved data capturing after the implementation of GST leading to more compliance and elevated inflation.
The percentage of taxpayers opting for the new tax regime is less because of the non-availability of deductions. Currently, the new tax regime is only for those with no cash flow to invest in tax-saving schemes. However, traditionally, Indians are diligent savers and tend to maximise tax savings and claim deductions.
The facility tax savings under the new regime are seen limited, with maximum savings feasible of `78,000 for income up to `20 lakh, against as high as `4.29 lakh in the conventional regime, thanks to deductions and exemptions. The condition of lock-in if the individual taxpayer carrying on a business/profession opts for the regime is also seen onerous.
Currently, if the total income of a working individual is up to Rs 5 lakh, there is no tax payable by her in both the tax regimes due to a rebate available under Section 87A of the Income Tax Act. But if the income exceeds beyond the threshold, the tax has to be paid on income above Rs 2.5 lakh at the rate of 5% in both the regimes. But the tax liability is nil for most such taxpayers in the older regime as they claim various deductions and exemptions.
In the older regime, some 70-odd deductions and exemptions are allowed such as standard deduction, the exemption for house rent allowance and leave travel allowance (LTA), deductions under Section 80C (for various investments and payments such as tuition fees, principal repayment of housing loan), 80D (for medical insurance/expenses), 80TTA (saving bank interest) or deduction of Rs 2 lakh for housing loan interest to name a few.
The exemption-free regime offers lower tax rates in a graded manner, that is, 5% rate for income of Rs 2.5-5 lakh, 10% for Rs 5-7.5 lakh, 15% for Rs 7.5-10 lakh, 20% for Rs 10-12.5 lakh, 25% for Rs 12.5-15 lakh, and 30% for over Rs 15 lakh. Analysts say the six-slab structure compared with the three in the old regime may also have confused people.