In the Union budget announced on Wednesday, Finance Minister Nirmala Sitharaman sought to incentivise a shift towards the new income tax regime introduced in 2020-’21.
While the old regime offered a way to lower taxes by taking into account investments such as provident fund or house purchase on a loan, the new regime has simpler, lower tax slabs but no exemptions based on investments.
However, the new regime has been a slow starter, with very few taxpayers opting for it. As a result, the current budget is a serious attempt at pushing it by making the older tax regime less attractive.
If it succeeds, the larger potential impact on the economy would be a fall in savings and a rise in domestic consumption, since the new tax regime increases disposable income and thus the spending power of the middle class.
New tax regime revamped
Sitharaman proposed a revamp to income tax slabs, raising the rebate limit from the current Rs 5 lakh income per annum to Rs 7 lakh. However, taxpayers can avail of this new exemption only in the new tax regime.
In other words, while taxpayers in the new tax regime with income up to Rs 7 lakh will not have to pay any tax, those opting for the old tax regime will have exemption up to Rs 5 lakh only.
Additionally, the updated tax slabs in the new tax regime have taxation rates lower than those introduced in the Budget for the financial year starting 2020-’21. In the previous slabs, those with total income between Rs 5 lakh to Rs 7.5 lakh were taxed at a rate of 10%, Rs 7.5 lakh to Rs 10 lakh at 15%, Rs 10 lakh to Rs 12.5 lakh at 20%, Rs 12.5 lakh to Rs 15 lakh at 25%, and those above Rs 15 lakh at 30%.
However, for those availing of the new tax regime now, the proposed rates will now be 10% for Rs 6 lakh to Rs 9 lakh, 15% for Rs 9 lakh to Rs 12 lakh, 20% for Rs 12 lakh to Rs 15 lakh and 30% for those with income above Rs 15 lakh.
A slew of benefits
Sitharaman argued that this would provide “major relief” to taxpayers who opt for the new regime. “An individual with an annual income of Rs 9 lakh will be required to pay only Rs 45,000,” the finance minister said in her Budget address. “This is only 5% of his or her income. It is a reduction of 25% on what he or she is required to pay now, that is, Rs 60,000.”
Additionally, the finance minister proposed extending the benefit of standard deduction for the salaried class and pensioners including family pensioners. The standard deduction is subtracted from a taxpayer’s taxable income for the purpose of tax calculations.
Like earlier benefits, this would also only be open to people who opt for the new tax regime. Due to these changes, Sitharaman suggested, salaried individuals under the new tax regime with an income of Rs 15.5 lakh and more would save Rs 52,500 annually.
Sitharaman also proposed to make the updated new income tax regime the default regime, even though taxpayers will be able to opt for the old tax regime if they choose to.
This proposed change from the government came following two years of the new tax regime. The alternate system attempted to offer lower and simpler tax rates while taking away nearly 70 exemptions and deductions such as house rent and education allowances. However, till now the new regime has struggled to gain acceptance among taxpayers.
While these new incentives make the new tax regime more attractive than it was previously, which regime results in less tax for a particular taxpayer will depend on a variety of variables, ranging from personal income to the nature of her investment basket.
Boosting consumption
The proposed changes to the new tax regime came after experts such as former revenue secretary Tarun Bajaj argued that more taxpayers need to be incentivised to shift to the new tax regime. For this, they had recommended that the old tax regime needed to be disincentivised.
The impact on the wider economy will be an attempt to prioritise consumption in the face of weak domestic demand.
Saugata Gupta, managing director of fast-moving consumer goods company Marico, told The Economic Times that the changes to the new tax regime will help boost consumption. “Without being populist, it has been responsible and pragmatic to encourage investment and boost economic growth,” Gupta said on Wednesday. “With the rejigging of tax slabs, there will be more money left in the hands of consumers and higher disposable income always benefits consumption.”