Tax regime without exemption needs to be changed, say analysts


With few takers for the income tax scheme with no exemptions even after two years of its introduction, the government could consider allowing some basic deductions and making the slabs more graduated to make it more attractive to taxpayers under different tranches, according to analysts.

However, the dual regime tax regime may continue for another 2-3 years until the new regime is acceptable through a combination of deductions and reduced tax rates.

A review of the regime, introduced as an option for taxpayers in FY21 alongside the conventional regime which allows for various exemptions but with relatively higher rates, seems necessary given the lukewarm reaction of taxpayers to the new regime. However, a senior government official said any review, if necessary, could be undertaken at the appropriate time.

Less than 1% of taxpayers who filed returns through the Clear portal (formerly ClearTax) opted for the new regime, according to its CEO Archit Gupta.

gThe percentage of taxpayers opting for the new tax system is lower due to the non-availability of deductions. Currently, the new tax regime is feasible for those on lower incomes with no cash flow to invest in tax-saving regimes. However, traditionally Indians are diligent savers and tend to maximize tax savings and claim deductions,” Gupta said.

One option is to introduce a standard deduction of up to Rs 2 lakh in the new scheme without exemptions and phase out the old scheme after a period of time, said Sonu Iyer, partner at EY India.

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Alternatively, the government could also consider introducing a standard deduction of up to Rs. 2 lakhs and retaining section 80C/80CCD deductions limited to PF, PPF, LIC, Pension, NPS and 80D for mediclaim in the new tax regime . Insurance and retirement savings would be encouraged and also given that we have no formal security system to support post-retirement needs, or medical emergency tax breaks for such planning by Taxpayers should be incentivized by allowing deductions for these payments for medical reasons. insurance, pensions, savings for later, etc. Iyer said.

Currently, the exchange of tax savings under the new regime is very low. The maximum tax saving is Rs 78,000 for income up to Rs 20 lakh while the tax saving could reach Rs 4.29 lakh under the old regime if one claims a host of deductions and exemptions. There is an onerous blocking condition if the natural person taxpayer exercising an activity/profession opts for the new regime.

Under the old tax system, some 70 deductions and exemptions are allowed, such as flat-rate deduction, exemption from housing allowance (HRA) and travel leave allowance (LTA) or deduction under of Section 80C (for various investments and payments such as tuition fees, home loan principal repayment), 80D (for medical insurance/expenses), 80TTA (savings bank interest) or deduction of Rs 2 lakh for home loan interest to name a few.

The non-exempt scheme offers lower tax rates in a graduated manner i.e. 5% rate for income of Rs 2.5-5 lakh, 10% for Rs 5-7.5 lakh, 15% Rs 7.5-10 lakh, 20% Rs 10 -12.5 lakh, 25% at 12.5-15 lakh and 30% for more than Rs 15 lakh. Analysts say the six-slab structure compared to three in the old regime may also have confused people.

The gSlabs could be reduced to three after some time when there will be only one scheme,” Iyer said, adding that there should be no tax up to Rs 5 lakh, 10% tax on Rs 5-10 lakh, 20% on Rs 10-20 lakh and 30% on income above 20 lakh.

The dual regime could continue for another 2-3 years until the impact of streamlined tax rates is seen through increased tax compliance and collections, Iyer added.

-Less than 1% of taxpayers who filed an ITR through the Clear portal opted into the new income tax regime
-Onerous condition for individuals with business income as they cannot revert to the old tax regime if they have opted for the new regime
-Tax savings can be up to Rs 4.29 lakh under the old scheme against Rs 78,000 under the new scheme for income up to Rs 20 lakh
The dual regime may continue for 2-3 years until the new tax regime is modified to make it attractive

If India is to retain a tax regime, it is most likely the new regime, where the government is keen to wean exemptions and deductions, said Aarti Raote, Partner, Deloitte India.


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