New income tax regime should be made more attractive

Under the new regime, the salaried class are not allowed the usual allowances and exemptions such as Leave Travel concession, House Rent Allowance, Standard Deduction of Rs. 50,000, etc. They cannot claim the interest on housing loans and most common deductions like Section 80C, Section 80D, Section 80G and Section 80TTA. To summarise, the benefit of reduced income-tax rates is available to those taxpayers who forgo specified deductions and exemptions. It is a conditional scheme. There are four tax slabs in the old regime, whereas, in the new regime, the tax slabs are seven. The tax rates continue to be at 30% under both regimes for the income exceeding Rs. 15 Lakhs. 

Investment in Section 80C tax savings options is prevalent among Indian taxpayers to safeguard money for post-retirement. Further, after the COVID-19 pandemic, the people have realised the importance of medical insurance, which is allowable as a deduction under Section 80D. Since these investment and saving tools are ubiquitous among taxpayers, they get deductions, which is not allowable in the new regime. The tax saving in the alternative regime is offset by the reliefs and exemption foregone.

The new regime seems to focus more on making Indians spend than save. For this, the government needs to introduce social security schemes so that Indians come out of savings culture and spend more to have a decent life with all luxuries at a younger age.

The decision to choose between two regimes depends on the facts of each case, and there could be no single thumb rule. Taxpayers must compute the tax liability under both options to decide which one is more beneficial. It has to be decided based on income level, tax savings investments, deductions, and exemptions for which the taxpayer is eligible. Taxpayers with more deductions and exemptions may continue paying tax as per the old regime.

The rebate under Section 87A is another reason for fewer taxpayers opting for the new regime. Due to this rebate, the tax payable becomes nil if the total income after claiming the deductions falls below Rs. 5 lakhs. In both tax regimes, individuals with income up to Rs. 5 lakhs are not required to pay any income tax as they get a tax rebate under Section 87A up to Rs. 12,500. Since the claim of most of the exemptions and deductions is not allowed under the new tax regime, the taxpayers couldn’t make their tax liability nil by reducing their income below Rs. 5 lakhs to avail the benefit of rebate under Section 87A. Therefore, they continue to choose the old tax regime.

The COVID-19 pandemic and work from home culture turned many people towards the stock market along with their jobs. The gains or losses arising from trading in Future and Options (F&O) are always taxable under the head ‘Profits and Gains from Business or Profession’. Thus, they become taxpayers having a salary and business income.

The people having a business income cannot change the option of a new regime every year.  The option needs to be exercised only once in the first year, and it will be valid for subsequent assessment years. They need to file Form No. 10-IE to opt for the new regime. The ‘opt out’ from section 115BAC is available only once in the case of persons having income from business/profession. Further, once he opts out of the option, he shall not be eligible to exercise the option again under the section unless he ceases to carry on his business or profession. Therefore, these conditions make business taxpayers less inclined towards the new regime. 

It is not easy for the taxpayer to understand so many nitty-gritty of tax laws. Thus, the Finance Minister should simplify the conditions attached to the new regime for the taxpayers to choose between the two options. Further, the restrictions under the new regime should be relaxed to claim taxpayers at least common exemption and deductions to make the new regime attractive for the taxpayers.

CA Naveen Wadhwa, DGM – R&D, Taxmann, CA Tarun Kumar, ​B.Com, FCA, DIIT-ICAI