How the new tax regime can be made attractive

Simplification of personal tax regime is one of the major expectations. Currently, individual taxpayers have the option to choose between two tax regimes – the old tax regime which used tax slabs of 5%, 20% and 30% and allowed taxpayers to avail all eligible exemptions and deductions and the concessional or new tax regime, introduced from the financial year 2020-21, which provides lower tax slabs but excludes certain exemptions and deductions. The objective of introducing the new regime was to eventually move towards a low/medium tax rate tax regime without exemptions and deductions to ease compliance for taxpayers and reduce the administrative burden of income tax authorities and employers.

was estimated to have an annual revenue of Rs 40,000 crore will be left out due to the new arrangement.

An important point to note is that under the old tax regime, the principal amount which is not chargeable to tax goes up to 3 lakh for resident senior citizens of 60 or more but less than 80 years of age and 5 lakh for those above 80, no such exemption limit is available for resident senior citizens under the new dispensation.

Based on press reports, it appears that the new tax regime is not very popular and very few individual taxpayers have opted in over the past two years. Most of the salaried taxpayers are paying rent or repaying housing loan, contributing to provident fund (PF) or NPS, paying medical insurance premium, and getting interest income from savings bank account. For such taxpayers, if they evaluate the new tax regime, they will find that the tax payable is higher in spite of lower tax rates as compared to the old tax regime. Accordingly, such taxpayers will opt for the old tax regime as it is beneficial to them.

Thus, there is a need to change the concessional tax regime to make it more effective and attractive for individual taxpayers. The government may propose the following changes to make it attractive:

One. New Slab Rates and Enhanced Limits (see table,

B. retain the standard deduction of 50,000

C. Provide deduction benefit up to section 24(b), 80C/80CCC/CCD/D 2.5 lakh, but limited to contribution towards provident fund (including PPF), eligible life insurance products, interest on housing loan, NPS and medical insurance. The introduction of the above deductions under the new regime may make CTR more attractive only for a selected set of benefits and for a limited period of time to cover requirements as individuals can claim tax benefits for necessary and incidental investments/expenditure. Will be able to. , Also, the cost of providing these tax cuts would not be significant for the government, but would definitely encourage more taxpayers to move to the new regime.

Sonu Iyer is the Tax Partner and People Advisory Services Leader at EY India. Siddhartha Deb, Director – People Advisory Services Leader, EY India, contributed to this article.