New Delhi: Even as the government makes the new income tax regime budget-friendly by offering a higher exemption limit and standard deduction, middle-income individuals may prefer to stick with the old regime .
Certainly those who earn less than $10 lakh per year and the super rich with an income of $Rs 5 crore and above can choose the new default income tax scheme, according to experts. However, the chairman of the central direct tax board, Nitin Gupta, said the number of beneficiaries who would take advantage of all the deductions by making all possible investments would be small.
Expert calculations show that those who win $10 lakh or more per year will face a tax liability of $54,600 under the new revised income tax regime, versus zero liability under the old regime, assuming the individual claimed all allowable deductions.
those who win $25 lakh per year will save $34,320 in taxes if they continue under the old income tax regime.
Opting for the new regime would mean foregoing some deductions that would otherwise be available to a beneficiary, such as the home rental subsidy, home loan interest, and tax-saving investments.
However, high income earners with an income of $Rs 5 crore or more who saw a reduction in the surcharge from 37% to 50% under the new income tax regime in the budget will benefit significantly from the new tax regime. For example, those with a total gross income of $6 crores per year could save as much as $21.6 lakhs in taxes, Nangia Anderson LLP calculations show.
Gupta said not everyone makes full use of the old regime’s income tax deductions and investment incentives, and those who do are outliers. Therefore, he said, everyone will benefit from the change to the proposed revised personal income tax regime.
The budget proposed allowing income tax refunds up to $7 lakh under the new regime, compared to $5 lakh offered under the old and new income tax regimes. According to government sources, this will benefit some 100 million taxpayers who are in the income bracket of $5 to $7 lakhs.
The government also proposed reducing the slabs from six to five and increasing the tax exemption limit from $2.5 lakhs to $3 lakhs. To encourage more test takers to switch to the new regime, the budget also proposed introducing a $50,000 standard deduction, which until now was only available under the old regime.
While Finance Minister Nirmala Sitharaman announced that the new tax regime will become the default from the 2023-24 tax year, taxpayers will still have the option to avail the benefits of the old tax regime.
“Due to the lower tax structure, optional nature of the scheme and full flexibility, there will only be winners emerging from the proposed change. There are no losers as those who tend to lose will not change. Even if a taxpayer chooses to benefit from the new scheme today and then circumstances change, making the old scheme more beneficial, they can switch to the old scheme at any time,” a government source said.
“The New Revised Tax Regime may not find popularity among the middle-income group, especially those who are in the habit of making tax-saving investments, such as life insurance and medical policies, or who receive home rental subsidies from their employers and pay rent for their accommodation or claim interest deduction on home loans etc,” said Maneesh Bawa, CEO of Nangia Andersen LLP.