‘The new tax regime still won’t benefit many’ | Latest News India | Times Of Ahmedabad

In the Union Budget presented on Wednesday, the finance minister made five announcements to reduce the tax burden of the hard-working middle class. Out of the announcements, four pertain to the new tax regime of Section 115BAC introduced three years ago as an alternative to the complex regime consisting of numerous exemptions and deductions. The last one is for the exemption on leave encashment.

The new tax regime allows individuals and Hindu Undivided Families (HUFs) to pay taxes at a reduced rate, with the trade-off of certain exemptions and deductions. However, despite the government’s efforts to simplify the tax system, the uptake of this regime was low due to the unavailability of common tax deductions and exemptions, like the deduction for insurance premiums, medical premiums, interest on housing loans, HRA, standard deductions, and so forth.

This budget aims to make the new tax regime more attractive. The maximum exemption limit and the number of tax brackets in the new tax regime have been revised. The new maximum exemption limit shall be ₹3 lakh, and for every additional income of ₹3 lakh, the next tax slab shall apply. There will be six tax slabs in the new regime – Nil, 5%, 10%, 15%, 20%, and 30%. The highest slab of 30% will continue to apply to income above ₹15 lakh.

Another change relates to the rebate under Section 87A. This rebate reduces the tax payment of a resident individual to zero if his total income is up to ₹5 lakh. The budget retains the limit of ₹5 lakh in the old regime but increases it to ₹7 lakh for individuals opting for the new tax regime. Thus, if your income is more than ₹5 lakh but up to ₹7 lakh, opting for the new regime will be more beneficial.

The next change is allowing the standard deduction for the first time to the employees opting for the new regime. The standard deduction is now allowed in both the old and new tax regimes.

Another announcement is reducing the highest slab of surcharge rate of 37% to 25% for individuals earning income above ₹5 crores. This reduced surcharge rate will apply when the individual opts for the new tax regime. In the old regime, the surcharge rate shall continue to be 37% if the income exceeds ₹5 crores.

One more announcement relates to the new tax regime, making it the default tax regime. It means that if an employee does not explicitly declare to the employer, the tax shall be computed and deducted as per the new tax regime. For non-salaried individuals, there will be an additional compliance requirement to opt for the old tax regime. Currently, a non-salaried individual has to file Form 10-IE to opt for the new tax regime. There may be a similar form for opting for the old tax regime, and the new tax regime shall apply by default.

Even after considering the above announcements, the new tax regime may not benefit many taxpayers. The paragraph below highlights the break-even points of the taxable income for the new tax regime.

The new tax regime is always beneficial if you are a non-resident or a resident individual not claiming any exemption or deduction. If you wish to claim the three deductions — interest on the housing loan, Section 80C (life insurance, etc.), and Section 80D (medical insurance), the old tax regime will have lesser tax. If you wish to claim two deductions under Section 80C and Section 80D, the new tax regime will be more beneficial if your total income exceeds Rs. 8.25 lakh. So you should go for the new tax regime if, after claiming the two deductions of Section 80C and Section 80D, your income is above Rs. 8.25 lakh. And if your income is below ₹7 lakh and you are a resident individual, the tax liability in the new regime shall be nil after claiming the rebate under Section 87A.

In conclusion, the budget presented by the finance minister promises significant benefits to the middle-class. In reality, many resident individuals earning salary income in Tier-1 and Tier-2 cities still go for the old tax regime. The deductions under Section 24, Section 80C and Section 80D are so common among salaried taxpayers that it still makes the new tax regime unattractive.

(Naveen Wadhwa, a chartered accountant, is DGM at Taxmann)