How the brand new tax regime could be made enticing

Expectations for tax sops are working excessive forward of the Union Budget in February as it could be the final full finances of this authorities earlier than the overall elections in 2024.

Simplification of the non-public tax regime is among the key expectations. Currently, particular person taxpayers have the choice to decide on between two tax regimes—the outdated tax regime that makes use of tax slabs of 5%, 20% and 30% and permits taxpayers to avail of all eligible exemptions and deductions, and the concessional or new tax regime, launched from monetary 12 months 2020-21, that gives decreased tax slabs however by forgoing sure exemptions and deductions. The goal of introducing the brand new regime was to finally transfer in direction of a tax regime of low/average tax charge with out exemptions and deductions to make compliance easier for the taxpayers and scale back the executive burden of the Income-tax authorities and employers.

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It was estimated that annual income of ₹40,000 crore shall be foregone as a result of new regime.

An essential level to notice is that whereas underneath the outdated tax regime, the essential quantity not chargeable to tax is elevated to ₹3 lakh for resident senior residents aged 60 or extra however lower than 80 and ₹5 lakh for these above 80, there isn’t any such relaxed threshold obtainable for resident senior residents underneath the brand new regime.

Based on press stories, it seems that the brand new tax regime shouldn’t be highly regarded and only a few particular person taxpayers have opted for it previously two years. Most salaried taxpayers are paying hire or repaying housing mortgage, contributing in direction of provident fund (PF) or NPS, paying medical insurance coverage premiums, and have curiosity revenue from the financial savings checking account. For such taxpayers, in the event that they had been to guage the brand new tax regime, they may discover that the tax payable is larger even with decrease tax charges underneath it, as in comparison with the outdated tax regime. Accordingly, such taxpayers would go for the outdated tax regime as it’s useful for them.

Thus, there’s a have to make modifications to the concessional tax regime to make it more practical and enticing for particular person taxpayers. The authorities could suggest following modifications to make it enticing:

a. New slab charges and elevated thresholds (see desk)

b. Retain normal deduction of ₹50,000

c. Provide the advantage of sections 24(b), 80C/80CCC/CCD/D deduction of as much as ₹2.5 lakh, however restricted to contribution in direction of Provident Fund (together with PPF), qualifying life insurance coverage merchandise, curiosity on housing mortgage, contribution in direction of NPS and medical insurance coverage. The introduction of the above deductions underneath the brand new regime just for a particular set of advantages and for a restricted time to cowl requirements could make the CTR extra enticing because the people would have the ability to declare tax advantages for investments/bills that are crucial and incidental. Also, the price of offering these tax deductions wouldn’t be important for the federal government however will certainly encourage extra taxpayers to maneuver to the brand new regime.

Sonu Iyer is tax accomplice and other people advisory companies chief at EY India. Siddharth Deb, director – individuals advisory companies chief, EY India, contributed to this text.

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