Exemption-less income tax regime; see changes

Less than half a million taxpayers have opted for the new exemption-less income tax regime since its rollout, prompting a review to see if measures are needed in the budget to promote its adoption, people familiar with the matter said.

About 75.2 million income tax returns have been filed in the current assessment year.

“Response to the new regime has been lukewarm,” said one of the persons. It was expected that the new regime for individuals would see traction like the one for the corporate sector. However, its acceptance has been much below expectations.

Options for Policymakers

The scheme offers lower tax rates of 5%, 10%, 15%, 20%, 25% and 30%, with the peak rate applicable to incomes of more than Rs 15 lakh. The regular regime with exemptions has three slabs (5%, 20% and 30%) and the peak rate is levied on incomes of more than Rs 10 lakh.

Policymakers are now examining the regime more closely to see what could be done to trigger a shift to the simpler, without exemptions, personal income tax regime.

One of the suggestions is to raise the taxable income threshold from ₹2.5 lakh or widen the tax slabs to bring down tax. Another is to allow some very limited deductions, like on health insurance or housing.

Finance ministry officials have, in the past, admitted to the need to rewrite the new regime for its greater acceptance.

A similar view was expressed by Bibek Debroy, chairman of the Economic Advisory Council to the Prime Minister, in a recent interview with ET. “Fact of the matter is, people have not volunteered that much for the exemption-less system, which means one needs to look at this and figure out some ways to incentivise this,” Debroy said, adding that one way of doing it would be by introducing differential rates under the two regimes.

Tax experts say the effective tax outgo after claiming all deductions under the old tax regime turns out to be lesser for many individual taxpayers – a reason why most have not switched.

“To make the new tax regime more attractive, slab rates should be revised upwards to encourage people to opt for the simplified regime and eventually do away with the tax deductions, which complicate the overall tax statute, besides adding to the administrative burden for employers, employees and the tax department,” said Vikas Vasal, national managing partner, tax, Grant Thornton Bharat.

The new exemption-free regime was announced by finance minister Nirmala Sitharaman in the fiscal 2021 budget.

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