Budget 2023: Old Vs New Tax Regime - The Journey So Far

Finance Minister Nirmala Sitharaman had introduced the simplified tax regime in 2020 to provide significant relief to individual taxpayers and as the name suggests, to simplify the process of filing taxes.

The simplified regime was intended to significantly reduce tax for individual taxpayers / HUFs who forego certain deductions and exemptions. Taxpayers have the option to choose the simplified tax regime or the regular tax regime, whichever is favourable to them.

However individual taxpayers having income from business and profession, can exercise the choice only once with the option to switch back only once in the lifetime. Taxpayers having no income from business and profession can change the regime every year.

The Regime    

The simplified tax regime provides for seven income slabs against four in the regular tax regime and provides for gradual increase in tax rates as below:

The tax, surcharge and cess would apply uniformly to tax computed under both regimes. To avail of the reduced tax rates under the simplified tax regime, one must give up common deductions such as standard deduction, house rent allowance, leave travel concession, interest on housing loan, section 80C, section 80D deductions, etc.

Illustration 

Let us understand the difference in both the regimes with the help of an illustration. Let’s say an individual has a gross salary income of Rs 25 lakh and is eligible for a housing rent deduction of Rs 1.8 lakh, contributing to provident fund/ Life insurance premium of Rs 1.5 lakh, contribution to National Pension Scheme of Rs 50,000 and medical insurance premium of Rs 20,000. The taxable income and the tax liability under both regimes is mentioned below:

In this illustration, the regular tax regime works to be more beneficial to the taxpayer considering that he has significant deductions. The simplified tax regime would be more beneficial when the taxpayer does not have any deductions/ exemptions. Opting for the simplified tax regime also saves the employee from the hassle of submitting evidence for investments and the employer from their verification.

The Journey So Far

In the Budget speech, the Finance Minister indicated that the simplified regime was a step to simplify the income-tax system with 70 of the existing 100 plus deductions/ exemptions being eliminated. It was further proposed that the remaining deductions would also be reviewed and rationalised in future.

However, based on inputs from companies and tax professionals, it appears that in the past two years, less than 10% of taxpayers have opted for the simplified tax regime. The primary reason being that regular regime proves to be more beneficial. Even if one was to consider mandated deductions such as standard deduction and contribution to provident fund along with HRA or housing loan, the regular tax regime would prove to be more beneficial.

Other reasons could be lack of awareness of the taxpayer, filing of belated tax returns in which case, a simplified tax regime option is denied or having income from business where the option once selected cannot be changed.

Way Forward

The finance minister on several occasions has reiterated her intent to wean out deductions and exemptions to make the tax filing process administratively simple. However, given the trend in the past two years, it is clear that additional efforts are required to make the simplified tax regime attractive.

The government could look at extending mandated deductions such as standard deduction and PF investments, to the simplified tax regime. Additionally the thresholds for the same could also be enhanced. The tax rates may also be further reduced to make the scheme more popular and the scheme extended to taxpayers filing belated tax returns as well. These few tweaks could tip the scales in favour of the simplified tax regime.  

Aarti Rahul Raote is Partner, Deloitte India and G S Vinodraj is a Manager with Deloitte India.

The views expressed here are those of the author, and do not necessarily represent the views of BQ Prime or its editorial team.