New Income Tax Regime To Benefit Individuals Despite Lack Of Exemptions, Says Official

The new income tax regime with lower rates will benefit taxpayers even if they are unable to avail any tax exemptions and deductions, according to a government official.

Finance Minister Nirmala Sitharaman introduced the optional new regime in her Budget speech on Saturday.

Despite the availability of several deductions and exemptions under the old regime, only 10 percent of India’s 5.78 crore taxpayers avail of exemptions of more than Rs 2 lakh, the official said requesting anonymity. About 5.3 crore taxpayers claimed deductions of below Rs 2 lakh from their taxable income using the more popular options, which include the standard deduction of Rs 50,000, the various options available under Section 80C of the Income Tax Act, as well as the deductions available for health insurance and contributions to the National Pension Scheme, the official said.

The Budget proposed to change tax rates as:

• For individuals earning between Rs 5-7.5 lakh per annum, the income tax rate has been reduced to 10 percent from 20 percent earlier.
• For individuals earning between Rs 7.5-10 lakh per annum, the income tax rate has been reduced to 15 percent from 20 percent earlier.
• For individuals earning between Rs 10-12.5 lakh per annum, the income tax rate has been reduced to 20 percent from 30 percent earlier.
• For individuals earning between Rs 12.5-15 lakh per annum, the income tax rate has been reduced to 25 percent from 30 percent earlier.
• For individuals earning above Rs 15 lakh per annum, will continue to pay 30 percent without any exemptions. People with income below Rs 5 lakh per annum will be exempt of tax in the new regime. Under the existing structure, people with a taxable income between Rs 2.5 lakh and Rs 5 lakh received a rebate and effectively paid no tax.

Many individuals, according to the official quoted earlier, are unable to invest in tax-saving instruments and are therefore unable to take full advantage of all the available deductions. Such people will end up paying more tax under the old regime as compared to the new one, the official said.

Pensioners or senior citizens, who do not make investments in provident fund or buy a home, don’t get all deductions under the old tax system, the official said, adding that an individual running a small company doesn’t get benefits like leave travel concession and housing rent allowance but will now benefit from the new tax system.

The tax incidence for taxpayers under the new rates compared to the old ones will be as follows:

While these estimates take into account the standard deduction of Rs 50,000 for salaried employees and Rs 1.5 lakh under Section 80C, they leave out benefits like house rent allowance and Section 24, which allow for deductions up to Rs 2 lakh on interest paid on home loans. They also don’t consider exemptions that salaried employees, especially those at higher income levels, can avail of for expenses on entertainment and conveyance.

According to Ameet Patel, partner at Manohar Chowdhry & Associates, it’s obviously very possible that at the end of the (tax planning) exercise, you may find that you’re better off going under the old regime and not opting for the new regime. “But everything would depend on the facts of each case,” Patel had told BloombergQuint after the Budget presentation on Saturday.