Improving the Attractiveness of the New Personal Income Tax Regime

Government insiders, speaking anonymously, have indicated that achieving additional migration of taxpayers to the concessional personal income tax regime beyond the current 60% may necessitate further adjustments to enhance its appeal. While several options are being contemplated, there are suggestions that any such measures might be postponed until after the interim Budget on February 1.

Tax experts suggest that the government may need to consider raising the threshold for the highest Personal Income Tax (PIT) rate of 30%, currently applicable at Rs 15,00,000, to at least Rs 20,00,000. Alternatively, they propose a reduction in the marginal rate itself to 25%.

These adjustments could lead to substantial tax savings under the exemption-less regime, which was modified in the FY24 Budget to encourage taxpayers to shift from the old regime, offering various exemptions and deductions. However, experts believe that any marginal increase in rebates won't significantly impact tax liability under the concessional regime, as the regime already ensures nil tax liability for annual income up to Rs 7.5 lakh due to rebates and the standard deduction of Rs 50,000.

A higher threshold for the marginal tax rate is more suitable for a progressive income tax system than reducing the highest tax rate because the former benefits low-income taxpayers more in relative terms.

If the Budget, whether interim or main, increases the threshold to Rs 20,00,000, it will enable an income tax assessee earning above Rs 25,00,000 a year to save an additional Rs 52,000. Similarly, an assessee earning Rs 20,00,000 a year will be able to save an extra Rs 46,800 annually, as per an analysis.

To make the new tax regime more appealing, experts suggest two potential changes: 

1. Lowering the Highest Tax Rate: Consider reducing the highest tax rate from 30% to 25%. This would benefit individuals with incomes above Rs 20,00,000, providing additional savings.

2. Increasing Income Threshold: Raise the income threshold for the highest rate from Rs 15,00,000 to Rs 20,00,000. This adjustment would further enhance the attractiveness of the new tax regime.

Additionally, experts recommend increasing the standard deduction and basic exemption limits for greater financial relief. They propose allowing set-off for house property loss under the new regime, providing an incentive for taxpayers to switch systems.

While the new tax regime offers lower rates, it lacks certain deductions available in the old regime, such as HRA, LTA, and specific 80C deductions. The benefits of these deductions should be carefully considered when choosing between the two regimes.

In conclusion, experts emphasize the need for clarity and adjustments to improve the appeal of the new tax regime, making it more competitive and taxpayer-friendly.

Also Read: New Modifications May Affect The New Tax Regime!