New Modifications May Affect The New Tax Regime!

Shifting more taxpayers to the concessional personal income tax regime beyond the current 60% reported would require additional adjustments to enhance its appeal, according to government sources who spoke anonymously. Various options are being considered, but there's a suggestion that these measures might be delayed beyond the interim Budget on February 1.

Tax experts suggest that the government may need to raise the threshold for the highest Personal Income Tax (PIT) rate, currently set at 30% and applicable from Rs 15,00,000 to at least Rs 20,00,000. Alternatively, there could be a consideration to reduce the marginal rate itself to 25%.

These modifications are expected to bring notable tax savings under the exemption-less regime. The FY24 Budget aimed to incentivize taxpayers to transition away from the old regime, known for various exemptions and deductions. However, experts believe that even a slight increase in rebates won't significantly impact the concessional regime, where the tax liability is already nil for annual incomes up to Rs 7.5 lakh, thanks to existing rebates and the standard deduction of Rs 50,000.

Boosting the threshold for the marginal tax rate is more beneficial for a progressive income tax system than reducing the highest tax rate. Increasing the threshold to Rs 20,00,000 in the Budget could result in additional savings for taxpayers. 

For instance, those earning above Rs 25,00,000 might save Rs 52,000 more annually, while those with a yearly income of Rs 20,00,000 could save an extra Rs 46,800, as per an analysis by FE. On the other hand, raising the threshold to Rs 25,00,000 could lead to savings of Rs 1,04,000 for those earning above Rs 30,00,000.

However, reducing the highest tax rate from 30% to 25% would result in comparatively smaller additional savings, such as Rs 23,400 for those earning above Rs 20,00,000 (just 1.17% of income) and Rs 75,400 for those earning above Rs 30,00,000 (2.51% of income).

To enhance the popularity of the new tax regime, the government increased the rebate under Section 87(A) to Rs 70,00,000 and raised the basic exemption to Rs 3,00,000 in the last Union Budget. Additionally, the standard deduction of Rs 50,000 a year, available for salaried and pensioners under the old tax regime, was extended to the default tax regime.

The new tax regime features lower income tax rates with the highest tax rate threshold of Rs 15,00,000, compared to the old regime where the threshold was Rs 10,00,000. In the old regime, taxpayers benefit from various deductions like House Rent Allowance (HRA), Leave Travel Allowance (LTA), 80C deductions, 80D, and an additional contribution of Rs 50,000 under the National Pension System (NPS). 

It also allows a deduction under Section 24 for interest paid on a home loan up to Rs 2,00,000 annually. However, these benefits are not available in the new regime.

For family pensioners, a standard deduction of Rs 15,000 was introduced in the new tax regime last year. Additionally, the new regime permits a deduction for NPS contributions made by the employer to an employee’s NPS account under Section 80CCD (2). While private sector employees can claim a maximum deduction of 10% of their salary, government employees can claim a deduction of 14% of their salary (basic salary plus dearness allowance).

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