Finance Minister Nirmala Sitharaman last year declared a new tax regime for the taxpayers. The new tax slabs and tax rates announced a concessional tax regime leaving the individual taxpayers with a dilemma. Union Finance Minister Nirmala Sitharaman will present the Budget on February 1, 2021.
In the new system, there are seven tax slabs, whereas, in the one earlier there were four. A taxpayer opting for the new system will not get any benefits in aspects of exceptions and deductions. For example- in 80C for investments, 80D for medical insurance premium, under Section 24 for interest on a home loan, contribution to a pension scheme, house rent allowance, standard deduction, etc, there are altogether 70 exemptions available for an individual taxpayer.
The previous tax regime had a better (lower) tax rate but denied as many as 70 exemptions and deductions available under the income tax laws (including LTC, HRA, standard deduction, etc.). However, the new tax regimes are liberal. It is said that the new income tax regime is a step towards tax reform but a large scale of middle-class society is not attracted towards the new system.
From the perspective of tax efficiency, how the new slab rates compare with the normal brackets with deductions and their ease of compliance might attract citizens of the nation. The government can even lower the tax rates to convince its citizens of its benefits.
On the other hand, people who have made investments in the new past and are paying home loans, claiming for HRA, rent allowances are highly reluctant to support the new system. Such payments are crucial and cannot be avoided. This section of people is not able to comprehend the new regime that puts the onus on taxpayers to take better control of their saving and investing requirements. The new system is on its path of a policy shift. The government wants its fellow citizens to think beyond tax incentives and wants to offer you greater flexibility.
It cannot be denied that the new system has not gained acceptance as tax slabs are narrow and tax liability is higher for most people. The finance minister needs to make this concessional scheme more attractive for taxpayers so that more and more people use it. It would lead to a much simpler process, and save a lot of time for the individual, human resources in corporations and tax authorities.
The Centre is unlikely to modify personal income tax slabs during the upcoming Budget for 2021-22 financial year, however, the Ministry of Finance is still focusing on granting income tax relief through other measures.
In the previous financial year, due to COVID-19, taxpayers may have little left to invest for tax saving. It will be interesting to see how many people switch to the new regime at the time of filing their tax returns for FY 2020-21. A longer review period is needed to assess the potential of the new regime.
