New I-T regime may see more tweaks

Date: January 12, 2024
# News

Any further shift among the taxpayers to the concessional personal income tax regime from 60% reported so far will require further tweaks to make it more attractive, government sources said on condition of anonymity. A few options in this regard are under consideration, they said, but hinted that these steps might get deferred beyond the interim Budget on February 1.

Tax experts say the government might have to increase the threshold for the highest PIT rate of 30% –which now kicks in at Rs 15,00,000 – to at least Rs 20,00,000. Alternatively, the marginal rate itself may be reduced to 25%.

These changes would result in significant tax savings of under the exemption-less regime, which was modified in the FY24 Budget to encourage taxpayers to discard the old regime, which allows sundry exemptions and deductions. However, any marginal increase in rebates – tax liability under the concessional regime is nil for annual income up to Rs 7.5 lakh thanks to rebates and the standard deduction of Rs 50,000 – won’t make any big difference, the experts reckon.

A higher threshold for the marginal tax rate would be suitable for a progressive income tax system, than reducing the highest tax rate, because the former benefits the low-income taxpayers more in relative terms (see chart).

If the Budget (either interim of the main) increases the threshold to Rs 20,00,000, it will help an income tax assessee earning above Rs 25,00,000 a year save Rs 52,000 more. Similarly, an assessee earning Rs 20,00,000 a year will be able to save an extra Rs 46,800 a year, an analysis by FE shows. Those earning Rs 10,00,000 a year will see no change in the tax outgo.

If the threshold is increased to Rs 25,00,000 a year, an assessee earning above Rs 30,00,000 can save Rs 1,04,000 in tax a year. Those earning Rs 25,00,000 can save Rs 98,800 and those earning Rs 20,00,000 can save Rs 46,800, the analysis shows.

However, if the highest tax rate is reduced from 30% to 25%, an assessee earning above Rs 20,00,000 will save just Rs 23,400 additionally (just 1.17% of his income), while one who earns above Rd 30,00,000 would save Rs 75,400 (2.51%) extra.

To make the new tax regime popular, the government in the last Union Budget raised the rebate under Section 87(A) of the Income Tax Act, 1961 from Rs 5,00,000 to Rs 70,00,000. It also raised the basic exemption under this regime to Rs 3,00,000 from Rs 2,50,000 and also extended the standard deduction of Rs 50,000 a year available for salaried and pensioners under the old tax regime to the default tax regime.

So, a resident individual with taxable income up to Rs 7,00,000 will receive a Rs 25,000 tax relief for FY 2023-24 (AY 2024-25). In the old tax regime, the rebate remains unchanged —Rs 12,500 for income up to Rs 5,00,000.

The new tax regime offers lower income tax rates with a threshold of Rs 15,00,000 for the highest tax rate as compared to the old regime where the threshold for highest tax rate was Rs 10,00,000.

Maneesh Bawa, Partner, Nangia Andersen LLP, says to further enhance the appeal of the new tax regime, the government should consider to lower the highest tax rate from 30% to 25% and to increase the income threshold for this highest rate from Rs 15,00,000 to Rs 20,00,000. “Additionally, raising the standard deduction limit and the basic exemption limit, would provide more financial relief to taxpayers,” he says.

He adds that the government should allow the set-off for house property loss under the new regime. “This would be a major incentive for taxpayers to switch to the new system, as it could potentially offset some of the lost deductions from the old regime.”

Under the old regime, taxpayers have access to various deductions such as House Rent Allowance (HRA), Leave Travel Allowance (LTA), and 80C deductions, 80D and additional contribution of Rs 50,000 under National Pension System (NPS). It also allows deduction under Section 24 for interest paid on a home loan up to Rs 2,00,000 a year. However, these benefits are not available under the new regime.

For family pensioners, a standard deduction of Rs 15,000 was introduced under the new tax regime last year. The new tax regime allows a deduction for NPS contribution by the employer to an employee’s NPS account under section 80CCD (2). While private sector employees can claim a maximum deduction of 10% of their salary, government employees can claim a deduction of 14% of their salary (basic salary plus dearness allowance).

Experts say the new tax regime is beneficial for high networth individuals earning over Rs 5 crore as the maximum marginal tax rate has dropped from 42.74% to 39% due to changes made in the rate of surcharge in the last Budget. The surcharge rate on income over Rs 5 crore was slashed to 25% from 37% in the new regime. However, the surcharge was not reduced for the old tax regime.

Tax experts say though any increase in the threshold limit for the highest tax rate will attract more taxpayers under the default regime, it is unlikely that the government will introduce any further amendments as the upcoming Budget is an interim one, preceding the general elections in the summer. Typically, significant policy changes are not made in an interim budget as it just manages the expenses until a full budget is presented by the new government in July.