The year 2020 was challenging for the salaried class. From salary cuts to coping with additional expenses due to remote working and inability to claim certain exemptions like fuel reimbursements, etc, the salaried class braved it all. Given this, the taxpayers are expecting relief in the form of increase in exemptions/deductions from the government in the upcoming Budget.
Last year’s Budget introduced the new concessional tax regime that offers an individual the option to choose lower tax rates in lieu of forgoing certain tax exemptions and deductions. Some of these benefits include standard deduction, exemption towards house rent allowance, leave travel allowance, house property loss, and deduction towards provident fund contributions and life insurance premiums.
The new regime, effective from financial year 2020-21, prescribes tax rates ranging from 5% to 30% with the highest tax rate applicable for income above Rs 15 lakh. This option is beneficial in those cases where an individual has fewer exemptions and deductions to be claimed. Individuals with higher income levels and tax-saving investments qualifying for deductions or exemptions may not find the new regime attractive.
Evaluation of certain factors will be important for individual taxpayers before deciding whether to continue with the old tax regime or opt for the new tax regime.
Individuals with limited deductions or exemptions would have the advantage of more tax savings by opting for the new tax regime. The level of tax savings would depend on the income levels and every individual would have to undertake a fact-specific evaluation keeping in mind her/his investments.
While the new tax regime is beneficial for a select segment of individual taxpayers, there is a need to address the expectations of the other set of individual taxpayers who prefer to invest for securing their future and would like to avail the deductions linked to investments.
The pandemic has resulted in a financial burden on many and, hence, the taxpayers are looking for relaxations like extension of benefit to non-senior citizens (under the current law, senior citizens are allowed deduction of up to Rs 50,000) for medical expenditure under Section 80D, increasing the cap of interest on housing loan, extension of additional benefits available for first-time homebuyers, extending the benefit of the newly introduced LTC cash voucher to the next financial year, additional investment opportunities for availing tax benefits through investment in infrastructure bonds etc. Given the varied profile of taxpayers, there exists a case for coexistence of both the regimes going forward.
– Amarpal S Chadha
(The author is Tax Partner, EY India. Shanmuga Prasad, Senior Tax Professional with EY, has also contributed to this article. Views are personal.)