Expectations for tax sops are running high ahead of the Union Budget in February as it would be the last full budget of this government before the general elections in 2024.
Simplification of the personal tax regime is one of the key expectations. Currently, individual taxpayers have the option to choose between two tax regimes—the old tax regime that uses tax slabs of 5%, 20% and 30% and allows taxpayers to avail of all eligible exemptions and deductions, and the concessional or new tax regime, introduced from financial year 2020-21, that offers reduced tax slabs but by forgoing certain exemptions and deductions. The objective of introducing the new regime was to eventually move towards a tax regime of low/moderate tax rate without exemptions and deductions to make compliance simpler for the taxpayers and reduce the administrative burden of the Income-tax authorities and employers.
It was estimated that annual revenue of ₹40,000 crore will be foregone due to the new regime.
An important point to note is that while under the old tax regime, the basic amount not chargeable to tax is increased to ₹3 lakh for resident senior citizens aged 60 or more but less than 80 and ₹5 lakh for those above 80, there is no such relaxed threshold available for resident senior citizens under the new regime.
Based on press reports, it appears that the new tax regime is not very popular and very few individual taxpayers have opted for it in the past two years. Most salaried taxpayers are paying rent or repaying housing loan, contributing towards provident fund (PF) or NPS, paying medical insurance premiums, and have interest income from the savings bank account. For such taxpayers, if they were to evaluate the new tax regime, they will find that the tax payable is higher even with lower tax rates under it, as compared to the old tax regime. Accordingly, such taxpayers would opt for the old tax regime as it is beneficial for them.
Thus, there is a need to make changes to the concessional tax regime to make it more effective and attractive for individual taxpayers. The government may propose following changes to make it attractive:
a. New slab rates and increased thresholds (see table)
b. Retain standard deduction of ₹50,000
c. Provide the benefit of sections 24(b), 80C/80CCC/CCD/D deduction of up to ₹2.5 lakh, but limited to contribution towards Provident Fund (including PPF), qualifying life insurance products, interest on housing loan, contribution towards NPS and medical insurance. The introduction of the above deductions under the new regime only for a selected set of benefits and for a limited time to cover necessities may make the CTR more attractive as the individuals would be able to claim tax benefits for investments/expenses which are necessary and incidental. Also, the cost of providing these tax deductions would not be significant for the government but will definitely encourage more taxpayers to move to the new regime.
Sonu Iyer is tax partner and people advisory services leader at EY India. Siddharth Deb, director – people advisory services leader, EY India, contributed to this article.