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Alternative personal income tax regime finds few takers

According to online tax service provider Clear (formerly Cleartax), roughly 10% of taxpayers who utilized its portal for tax filing have opted for the new regimePremium
According to online tax service provider Clear (formerly Cleartax), roughly 10% of taxpayers who utilized its portal for tax filing have opted for the new regime

The old personal income tax regime, which allows deduction of certain expenses from the taxable income, remains popular among taxpayers, with comparatively few opting for the new alternative tax regime introduced in the Finance Act 2020

NEW DELHI : The old personal income tax regime, which allows deduction of certain expenses from the taxable income, remains popular among taxpayers, with comparatively few opting for the new alternative tax regime introduced in the Finance Act 2020, according to professionals assisting taxpayers to file returns. They said sweetening the simplified tax regime could encourage people to opt for it.

The new regime was introduced as a simplified system with more graded slabs that offered benefits to those not opting for exemptions and deductions. The idea also was to ensure that the tax slab shifts were more gradual than abrupt.

According to online tax service provider Clear (formerly Cleartax), roughly 10% of taxpayers who utilized its portal for tax filing have opted for the new regime.

“Personal income tax filing trend in Clear portal indicates that taxpayers have not preferred the new alternative tax regime of more graded slabs. Its adoption level is around 10% of all tax returns filed. The new tax regime was brought as a simplification mechanism, and a means to reduce the tax burden. However, taxpayers have chosen to go for tax deductions and claim other tax benefits instead of opting for the simplified regime," said Srivatsan Chari, co-founder, Clear.in.

The lukewarm response to the alternative tax regime could be a valuable input to the government at a time preparations are underway for the budget for the next fiscal.

“Union budget for FY22-23 could be an opportunity to relook at the new tax regime," Chari said.

An email sent to the finance ministry seeking comments remained unanswered at the time of publishing.

Experts pointed out that one reason for the popularity of the old scheme is the lack of publicly funded social security schemes for the vast majority, which makes retirement savings instruments with tax benefits highly popular.

According to Ved Jain, former president of the Institute of Chartered Accountants of India (ICAI), savings instruments with tax benefits under the older tax regime are important for social security and most personal income taxpayers have planned for it.

In a populous country, providing social security net for each individual, when they are not in a position to earn, entails high fiscal costs and, hence, individuals have been encouraged to invest in social security by giving tax relief to the extent of payments made in this regard, said Jain.

The non-availability of deductions for social security savings in the new tax regime has therefore made it less attractive. Also, discontinuing schemes one has signed up for, a life insurance policy for instance, may involve losses, while the new scheme does not give any deduction for the same.

“Allowing deductions for social security savings allowed under section 80C of the Income Tax Act (public provident fund, LIC premium, etc.,) and 80D (health insurance premium) in the new tax regime will be a win-win solution, and I am reasonably sure that by and large, all people will accept the new scheme if this is done," Jain said.

Experts also pointed out that when the government offered a new corporate tax regime in 2019 for businesses, the rate was lowered from 30% to 22% without tax exemptions, but in the case of the new personal income tax regime, the highest slab stays at 30% for the income above 15 lakh.

Those with incomes in the range of 5 lakh and 15 lakh stand to benefit from a rate reduction under the new scheme but they have to forgo the benefit of deductions.

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