The Union Budget 2024 has once again placed the spotlight on the new income tax regime introduced in 2020, aiming to simplify taxation and offer concessional rates. While salaried taxpayers now have more reasons to consider this regime due to tweaks in tax slabs and an increase in the standard deduction, it raises questions about its fairness and suitability for all.
Changes in the new tax regime
To encourage a shift to the new regime, Finance Minister Nirmala Sitharaman has made it more appealing by increasing the standard deduction from ₹50,000 to ₹75,000 and adjusting tax slabs. These measures can lead to savings of up to ₹17,500 for salaried individuals under the new regime.
Under the revised slabs for the next assessment year (2024–25):
- Income up to ₹3 lakh is tax-exempt.
- Income between ₹3 lakh and ₹7 lakh is taxed at 5%.
- Income between ₹7 lakh and ₹10 lakh falls under a 10% tax rate.
- Income between ₹10 lakh and ₹12 lakh is taxed at 15%.
- Income above ₹12 lakh is taxed at 20% and 30% in subsequent slabs.
These changes reflect a move towards simplicity by removing the need for extensive tax planning, but this comes at the cost of fewer deductions and exemptions.
Comparison with the old tax regime
The old tax regime provides a plethora of deductions under Chapter VI A of the Income Tax Act, including the popular Section 80C. It allows taxpayers to claim rebates for investments in Public Provident Fund (PPF), equity-linked savings schemes (ELSS), life insurance premiums, and deductions for interest on home loans for self-occupied properties.
Under the old system, taxable income below ₹2.5 lakh is exempt, and tax rates range from 5% to 30%, depending on the income slab. Senior citizens and super seniors benefit from higher exemptions of ₹3 lakh and ₹5 lakh, respectively. However, navigating these deductions can be complex for small taxpayers who lack surplus income to invest in tax-saving instruments.
Is the new regime fair?
The fairness of the new regime largely depends on the taxpayer’s financial situation and investment preferences.
Advantages
- Simplified Taxation:
The new regime eliminates the need for tax-saving investments, making it particularly beneficial for younger salaried taxpayers or those with limited surplus income. - Concessional Rates:
Lower tax rates and increased standard deductions offer immediate savings, especially for individuals without home loans or significant investments in tax-saving instruments. - Flexibility in Investments:
Taxpayers are no longer compelled to lock their money in tax-saving schemes and can explore other investment opportunities.
Disadvantages
- Loss of Incentives:
Taxpayers accustomed to using deductions like Section 80C may find the new regime less attractive. For instance, deductions on home loan interest for self-occupied properties and exemptions for house rent allowance (HRA) are not available in the new regime. - Reduced Savings Motivation:
The old regime promotes savings in secure instruments like PPF and ELSS. The absence of such incentives in the new regime might lead to a shift towards higher-risk investments, potentially altering taxpayer behaviour. - Unfavourable for Long-Term Planners:
Individuals who have structured their financial planning around tax-saving schemes may find that their tax liability increases under the new regime despite its lower rates.
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Who benefits the most?
The new regime is particularly advantageous for taxpayers without significant deductions or those unable to leverage the benefits of the old system. Young professionals with minimal financial commitments, such as home loans, may find the new regime appealing due to its simplicity and lower rates.
However, taxpayers with substantial investments in tax-saving instruments or those paying interest on self-occupied home loans might save more under the old regime. For example, the inability to claim interest deductions under the new system makes it less suitable for homeowners with outstanding loans.
Impact on investment behaviour
The shift towards the new regime may discourage investments in traditional tax-saving instruments like PPF, ELSS, and life insurance policies. These schemes, designed to foster a culture of saving, might see reduced participation, impacting their utility over time. Conversely, taxpayers might increasingly allocate their resources to equities and other high-risk investments.
The new income tax regime, while simpler and less reliant on tax-saving investments, may not be beneficial for everyone. It offers immediate relief to those with straightforward financial profiles but can disadvantage taxpayers who have optimised their savings under the old regime.
For salaried individuals, the choice between the old and new regimes will depend on their income level, financial commitments, and long-term investment goals. A thorough evaluation of tax liability under both systems is essential to make an informed decision. As the government continues to refine these frameworks, taxpayers must adapt to maximise their benefits in this evolving landscape.
