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Budget 2023: ‘New’ I-T regime may add some exemptions

January 16, 2023

Budget could also rejig slabs to lower taxpayer liability

With few takers for the exemption-free personal income tax regime, Union Budget 2023-24 is likely to review the tax structure and could announce a few sweeteners as well, as the government tries to incentivise more people to opt for it.

Under the additional personal income tax regime announced in Union Budget 2020-21, individual taxpayers who forgo most deductions and exemptions can pay taxes at comparatively lower rates. However, with no exemption for long-term investments, social security and medical insurance, the option hasn’t got any traction among taxpayers, including those in low-income brackets.

According to sources, the government is likely to continue with both personal income tax regimes: the older one, which offers tax exemptions and deductions with relatively higher tax slabs, and the “concessional” regime.

It is, however, looking at allowing certain exemptions such as those related to house rent, housing loan interest, social security and medical insurance even for the newer regime. The slabs could also be rejigged to ensure that the tax liability on most taxpayers will reduce, and more meaningfully for those in the lower tax brackets.

While the finance ministry is understood to be examining the issue, a final decision is expected in the next one week or so. The Union Budget will be presented in Parliament on February 1.

Experts noted that taxpayers do not want to forgo deductions on long-term investments. Further, with not enough government support for social security or medical treatment, individuals should not have to pay tax on investments for pension, provident fund and insurance, they said.

Kuldip Kumar, personal tax expert and former national leader, Global Mobility Practice, PwC India, said the current mechanism of new tax regime with multiple slabs and denial of several exemptions and deductions is not simple.

“Government should make this simple with fewer slabs and allowing of some important deductions like house rent allowance, leave travel allowance, 80C, 80D, 80TTA and housing loan interest of self-occupied house. If the purpose of (the new tax regime) is to bring in behavioural change in taxpayers to move away from exemptions and deduction regime and operate in simple tax regime, then advantage needs to be given to taxpayers where they have already made investment decisions considering the tax benefits,” he said.

While announcing the concessional tax regime, finance minister Nirmala Sitharaman had said it would simplify the personal income tax regime and provide significant relief to taxpayers, more so to those in the middle class.

Sandeep Sehgal, partner – tax, AKM Global, a tax and consulting firm, said while comparing the computations in both scenarios, the older regime is beneficial in several cases.

“The concessional tax regime should allow certain deductions such as standard deduction of `50,000 to the salaried person for house rent allowance, food allowance. Additionally, it should also focus on encouraging crucial exemptions such as investment for keeping life insurance policies, medical insurance policies considering the indispensable health benefits. Certain deductions and exemptions should be provided to exempt income up to `5 lakh to make it equal to the old regime,” he said.

While there is no official data on the number of taxpayers opting for the concessional income tax regime, less than 1% of the taxpayers who filed returns through the Clear (previously ClearTax) portal have opted for the new regime.

The move may also go down well with middle class taxpayers, who are hoping for some benefits in the Budget — the last-full fledged Budget of the government before general elections in 2024.

In the older regime, the tax rate moves rather steeply from 5% for incomes of Rs 2.5-5 lakh to 20% for Rs 5-10 lakh and 30% for above Rs 15 lakh. Many analysts have felt it does not make sense to jump from 5% to 20%.

The exemption-free regime offers lower tax rates in a graded manner, that is, 5% rate for income of Rs 2.5-5 lakh, 10% for Rs 5-7.5 lakh, 15% for Rs 7.5-10 lakh, 20% for Rs 10-12.5 lakh, 25% for Rs 12.5-15 lakh, and 30% for over Rs 15 lakh. Analysts say the six-slab structure compared with the three in the old regime may have confused people.

[The Financial Express]