Is the New Tax Regime appealing enough? : Practical difficulty of New Tax Regime.
Background: Utilization Trends of the New Tax Regime
The dual objectives outlined in the budget speech for the new tax regime are recognized, yet there is a noticeable reluctance to fully embrace it. This hesitation seems to originate from the elimination of numerous exemptions and deductions linked to choosing the new regime. Considering that Indian society tends to prioritize saving for future needs, the current behavioral patterns are not entirely congruent with the provisions of the new tax regime.
The limited number of individuals opting for the benefits under the new tax regime suggests that the majority of the population continues to favor the old or existing tax regime. This implies that, upon comparison, the existing tax regime has been deemed more advantageous to them than the new tax regime.
The new tax regime is notably advantageous for individuals earning more than 15 lacs or 1.50 million. Although the Government has implemented significantly reduced tax slab rates under this regime, individuals opting for it will forfeit access to major exemptions and deductions allowed under the old regime, such as HRA, LTA, standard deduction, Chapter VI-A deductions, and interest on home loan. These benefits, however, remain available for those who do not opt for the new regime. Moreover, individuals anticipating a substantial increase in income levels in the upcoming tax years may find the new regime beneficial, particularly if their annual income remains below INR 1.50 million.
Nature and popularity of deduction and exemptions not allowed under New Tax Regime:
Gist of deduction and exemption not allowed under new tax regime:
| (i) | Leave travel concession; | |
| (ii) | House rent allowance; | |
| (iii) | Standard deduction, deduction for entertainment allowance and employment/professional tax | |
| (iv) | Interest on house loan in respect of self-occupied or vacant property; | |
| (v) | Most deductions under chapter VIA |
Many of the deductions and exemptions mentioned above are essential and often long-term decisions for individuals earning beyond their subsistence. These provisions, such as HRA, LTA, standard deduction, and deductions under Chapter VI-A, play a crucial role in the financial planning of individuals by providing relief on expenses related to housing, travel, and other necessities. Therefore, for individuals earning above their basic subsistence levels, these deductions and exemptions are fundamental considerations in their financial strategy and not avoidable that too in the situations where government does not ensure any social security scheme assured for all.
Proposition/ expectations from upcoming Budget:
The Government’s amendment to include major exemptions or deductions, like HRA or Chapter VI-A deductions, would significantly benefit affected individuals. Taxing dwelling expenses could burden individuals, contrary to the Government’s housing-for-all focus. Moreover, the new tax regime undermines the Government’s goal of promoting savings for future uncertainties, as it removes incentives for individuals struggling to make ends meet to save for the future. Thus, government should include the one or more of the major exemptions and/or deductions.
Conclusion:
In conclusion, it’s worth considering whether offering at least one significant additional incentive to individuals opting for the new tax regime could make it more appealing. This could potentially draw a large segment of the salaried population into the tax-paying fold.
- Providing such an incentive would not only encourage compliance but also foster a sense of satisfaction among taxpayers.
- Psychologically, having an option to avail of deductions or exemptions can enhance the perceived value of the new tax regime.
By aligning incentives with taxpayer preferences, the Government can effectively promote tax compliance and broaden the tax base.
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