FM rejigs new tax regime to widen its appeal

Finance Minister Nirmala Sitharaman rolled out a slew of changes to the personal income tax provisions on Wednesday in a bid to make the new tax regime more attractive to taxpayers.

The new regime, which was unveiled in Budget 2020, has seen very few takers so far. While the new regime rationalised tax slabs and offered lower tax rates, it had fewer tax exemptions such as those tied to house rent allowance and interest on housing loans.

The government's intentions to get more takers for the new regime were further evident on Wednesday when it said that four of the five changes to the personal income tax were applicable only to those who opted for the new regime. The government has also decided to make it the default tax regime. That said, the old income tax regime has not been abolished and taxpayers would have the option to choose between the two.

Also Read: FM loosens purse strings to please all in pre-poll Budget

To make the new regime attractive, Sitharaman said income up to Rs 7 lakh will be tax-free for takers of the new regime versus the earlier threshold of Rs 5 lakh. She also reduced the number of slabs from six to five, made standard deduction available, cut the surcharge on the highest tax rate and raised the exemption limit for leave encashment.

She also rejigged the tax slabs to make them more competitive versus the old regime.

These changes come at a time when tax experts pointed out that the new tax regime needed an overhaul to come across as a good alternative to the existing income tax regime.

"When a similar approach in terms of doing away with the exemptions and deductions was done for corporate taxes, there was a significant dip at the top rate and it was brought down to a uniform 25 per cent, whereas here (personal taxation), we are still seeing the tax rates are not changed," Deloitte India’s Partner Saraswathi Kasturirangan had told DH.

The surcharge for high-income taxpayers has now been cut to 25 per cent from 37 per cent. It is applicable to those whose income levels exceed Rs 50 lakh and companies that have income levels above Rs 1 crore. The reduced surcharge will bring down the highest tax rate to 39 per cent from 42.74 per cent, which was among the highest in the world.

Budget 2023 extended the standard deduction of Rs 52,500 to salaried taxpayers having an annual income of Rs 15.5 lakh or more and opting for the new tax regime.

Also Read: Govt announces 150% hike in outlay of Swachh Bharat Mission-Urban; total allocation Rs 5,000 crore

Industry stakeholders said the government could do more on this front.

"To encourage more retail investing and insurance adoption, we wish that the honourable FM would increase tax savings for investments and reconsider the proposal to discontinue the tax SOPs on mutual funds and insurance," said Ravi Kumar, Co-Founder & CEO, Upstox.