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Deepashree Shetty, Associate Partner
Tax and Regulatory Services

16 January 2023

Union Budget 2020 introduced the concessional/New Tax Regime (NTR) under section 115BAC of the Income-tax Act, 1961 providing individuals andHUFtaxpayers an option to pay income tax at lower rates; subject to forgoing certain exemptions and deductions. The NTR was introduced to simplify the tax return filing process and to reduce the documentation required to claim exemptions/deductions.

Under the NTR, salaried individuals must forgo exemptions like House Rent Allowance, Leave Travel Allowance and deductions for prescribed investments/expenses which are otherwise available under the existing/old tax regime (OTR).

Even though NTR provides for lower tax rates with diversified income slabs, the OTR seems to be more popular, especially among salaried taxpayers. Below are some reasons why the NTR is comparatively not as appealing as the OTR:

Taxable income above ₹15,00,000 is taxed at 30% under both the OTR and NTR

- Contributions to long-term investments and retirement savings plans (such as the contribution to provident funds, insurance premiums, etc.) do not qualify for deduction under the NTR, unlike the OTR. These investments generally provide better returns

- Deduction for repayment of interest and principal components of housing loan in case of self-occupied property is not available under the NTR.

- For salaried taxpayers, the pinch could be more as the below exemptions/deductions are not available under the NTR:

- Exemption for rental expenditure against House Rent Allowance

- Exemption for travel expenses against Leave Travel Allowance/Assistance

- Standard deduction up to a maximum of ₹50,000

- Deduction up to a maximum of ₹2,500 for tax on employment or Profession Tax

- For a better understanding, refer to the illustration below:

Salaried taxpayers without income from business or profession can opt for the NTR each year; however, for salaried taxpayers with income from business or profession, the option is available only once and cannot be changed later.

NTR may be beneficial for taxpayers who do not have many investments or belong to low-income groups. This could also be beneficial for those who wish to have a hassle-free tax process without worrying to keep track of the exemptions/deductions to be claimed. But the comparative tax outgo seems higher under the NTR despite lower tax rates and hence, does not seem too beneficial for taxpayers.

Given the increased expenses for individuals, a just and tax-efficient single tax regime is the ask for the day. The upcoming Union Budget 2023 should address these challenges and revamp the NTR or introduce a simplified single tax regime.

Source: Livemint