Price range 2025 revenue tax: Will FM Nirmala Sitharaman scrap the previous revenue tax regime?
By Ishita Sengupta
Price range 2025 revenue tax expectations: As all of us gear up for the Union Price range later this week, the large query for particular person taxpayers is whether or not the Hon’ble Finance Minister will utterly scrap the previous tax regime? Effectively, time will solely give the reply however the moot query is – wouldn’t it be prudent to take action?
Let’s step again for a bit of research! The new revenue tax regime was launched in 2020 as an non-obligatory regime for particular person taxpayers. The first goal was to introduce a extra simplified tax construction by eradicating the plethora of deductions and exemptions. The Authorities additionally supplied vital aid to taxpayers by lowering income-tax charges, thus nudging them to undertake the brand new revenue tax regime. It was fairly obvious that the Authorities supposed to part out the previous revenue tax regime sooner or later. As per media experiences, there have been only a few takers of the brand new revenue tax regime within the preliminary years.
To present an extra push, vide Finance Act, 2023, the Authorities made the brand new revenue tax regime because the default regime and introduced extra engaging modifications associated to the brand new revenue tax regime, by lowering the income-tax charges additional, capping the utmost marginal charge (MMR) at 39%, introducing the usual deduction of ₹50,000 for salaried people, growing the revenue degree for 100% tax rebate and so forth. The development even continued for the next yr whereby vide Finance (No. 2) Act, 2024, the slab charges have been additional tweaked for higher, customary deduction for salaried people was hiked, deduction for employer’s NPS contribution elevated by 4% and so forth. This appears to have labored its magic. As per Press Launch issued by the Ministry of Finance on August 2, 2024, 72% taxpayers opted for the brand new revenue tax regime in FY 2023-24 ITRs filed till July 31, 2024.
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Whereas this seems to be a big proportion, one can’t disregard the truth that the 28% taxpayers choosing the previous revenue tax regime in FY 2023-24 continues to be a substantial quantity. Moreover, whereas we don’t have the required knowledge to grasp clearly which part of taxpayers are nonetheless in favour of the previous revenue tax regime, it’s not tough to guess. From salaried taxpayers’ perspective, those benefiting from common tax exemptions and deductions comparable to, HRA, LTA, dwelling mortgage curiosity, 80C deductions, insurance coverage premia, charitable donations and so forth. could be nonetheless choosing previous revenue tax regime.
Given this, is it value evaluating if the decrease tax charges beneath the brand new revenue tax regime actually offset the tax deductions/ exemptions which taxpayers should forego?
Now we have categorised particular person taxpayers in 4 common baskets as per their annual gross revenue – (A) people having revenue as much as ₹15 lakh, (B) people having revenue between ₹15 lakh – ₹1 Cr, (C) HNIs having revenue between ₹1 – ₹5 Cr and (D) ultra-HNIs having revenue past ₹5 Cr.
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Class A represents the most important submitting inhabitants, presumably younger salaried taxpayers, lots of them millennials, who might not have invested in long run belongings like home properties and different financial savings schemes. Therefore, they’d usually desire hassle-free submitting and fewer burden of documentation proof, and so forth. On the different finish of the spectrum are the ultra-HNIs who would favor the MMR presently capped at 39% within the new revenue tax regime on account of surcharge cap vis-à-vis 42.74% within the previous revenue tax regime. For each these classes, new revenue tax regime appears to be the clear winner.
It’s the folks in between who appear to make up the most important group because the previous revenue tax regime filers. These people typically spend a major a part of their earnings and financial savings on rising home hire and residential mortgage EMIs, youngsters’s training, medical expenditure particularly for his or her aged dependents and in direction of their very own retirement financial savings. In addition they are inclined to donate to assist a social trigger. HNIs would comparatively spend, make investments and donate extra.
The accessible customary deduction towards wage revenue is unquestionably not commensurate with the rising YoY bills. The continuity of present tax advantages beneath the previous revenue tax regime therefore turns into a essential a part of their monetary planning to fulfill their money budgets. As extra consequential tax financial savings could be accessible to people in Classes B and C and their MMR in each the regimes is similar, they’d typically discover the previous revenue tax regime extra engaging. It is usually necessary to keep in mind that many of those tax deductions, e.g., for dwelling mortgage curiosity, insurance coverage premia, financial savings schemes, and so forth. have been initially launched to improve the associated trade, by incentivising taxpayers to spend on them.
If discontinued, this might even have an antagonistic affect on such payee organisations and investee entities in assembly their targets, fund necessities and so forth. In view of those, the Authorities mustn’t rush to scrap the previous revenue tax regime fully, both within the present income-tax legislation or the possible new Direct Tax Code, not less than for a couple of extra years until the typical taxpayer develops the behavior of prudent monetary planning.
Within the interim, the Authorities might contemplate saying its roadmap of phasing out the previous revenue tax regime coupled with an extra carrot of decrease tax charges to encourage this middle-income group to voluntarily undertake the brand new revenue tax regime.
(Authored by Ishita Sengupta, Associate and India Chief, Vialto Companions. Shaishav Shah, Director, Vialto Companions contributed to the article. Views are private)
