New Tax Regime
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The New Tax Regime is a scheme of Income tax in India first proposed in Union Budget 2020–21.[1] Subsequent Budget of FY2021-22 did not see any major announcements in this regime.[2] During the Budget 2022–23, reports emerged that New Tax Regime was getting poor response[3] and Government is considering to make it more attractive among the taxpayers.[4]
The latest changes were presented in the Union Budget 2023-24 which brought five significant changes in the earlier existing (FY 2022–23) income tax policy. Improved rebate, modified tax structure/slabs, reduced surcharges, higher exemption on leave encashment for retirees in private-sector and extension of standard deduction in the New Tax Regime were announced by the Finance Minister, Nirmala Sitharaman during Parliament's Budget Session on 1 February 2023.[5]
Grappling with significant income disparities, India appeared to be prompting the policy regime to prioritize the expansion of the taxpayer base and incentivize new taxpayers to contribute to the national treasury. As per data released by the Income Tax Department, a mere 3.8% of individuals aged over 20 in India paid income tax in the financial year 2018-19.[6]
Introduction in FY20-21
The notion that millennial generation exhibit a proclivity towards spending rather than saving appears to have seemingly prompted the implementation of this New Tax Regime framework to boost consumption thereby helping combat the deceleration of economic growth during the time.[7]
The Union Budget proposed a simplified personal income tax regime aimed at providing substantial relief to individual taxpayers and streamlining the Income-Tax law. Under this optional New Tax Regime, individual taxpayers who chose to forgo specific deductions and exemptions would benefit from significantly reduced income tax rates.[1]
Union Minister for Finance and Corporate Affairs Nirmala Sitharaman revealed the government's intention to withdraw all Income-Tax exemptions in the long run. Individuals or HUFs opting for New Tax Regime are not entitled to exemptions for leave travel, house rent, among others under the section 115BAC of the IT Act.[8] However, the tax breaks that will not be available under the new tax regime are deductions like those in section 80C, 80CCC, 80CCD, 80D, 80DD, 80DDB, 80E, 80EE, 80EEA, 80EEB, 80G, 80GG, 80GGA, 80GGC, 80IA, 80-IAB, 80-IAC, 80-IB, 80-IBA, etc. under Chapter VI-A of Income Tax Act.[9]
Individuals who were at the outset of their professional journey starting anew and yet are interested in a streamlined approach found this New Tax Regime attractive.[10] This regime appeared to provide benefits to taxpayers who reside with their parents, those who are debt-free of home loan, and those who do not have any deduction instruments under Chapter IV-A. But the majority of taxpayers who were living in rented accommodations and claiming HRA along with other deductions were not disincentivized to opt for the New Tax Regime. It was seen as deterrent for opting small saving schemes which are popular among the masses.[11]
According to experts, taxpaying citizens might refrain from investing and instead choose to adopt a new tax regime. However, such a decision could potentially lead to the demise of their savings habit, which would be detrimental to the general populace.[7]
Status in FY22-23
The government implemented the new tax regime with the expectation that the changes in tax brackets would occur in a gradual rather than sudden manner.[3] Despite the simplified mechanism and reduced tax burden of the New Tax Regime, taxpayers were still choosing to opt for the old regime and took advantage of tax deductions. As per expert analysis, tax-advantaged retirement savings instruments had significant popularity among middle-class taxpayers which made the old regime look more appealing. Given the crucial role of these investments in ensuring social security, a majority of taxpayers had already subscribed them. Terminating an existing commitment such as a life insurance policy, after enrollment may prove challenging for taxpayers due to potential financial losses. Additionally, in the wake of the COVID-19 pandemic many taxpaying individuals have recognized the significance of having insurance, which is eligible for deduction in Old Tax Regime. Simultaneously, the New Tax Regime lacks provisions for deductions on such savings, thereby diminishing its appeal.[12][13][14]
