Quick Overview
The Indian government is considering a gradual phase-out of the old personal income tax regime, as indicated by Finance Minister Nirmala Sitharaman in the upcoming Budget for FY26. The new tax regime, which has gained popularity among taxpayers, may see adjustments to make it more appealing, while the old regime, which offers various exemptions, remains relevant for certain taxpayers.
Key Points
- Phase-Out of Old Regime: The government may announce a roadmap for phasing out the old tax regime, encouraging a shift to the new system.
- Adoption of New Regime: Over 72% of taxpayers have opted for the new regime, which features lower tax rates but fewer exemptions.
- Proposed Changes: Potential adjustments include increasing the basic exemption limit from Rs 3 lakh to Rs 4 lakh and modifying tax slabs.
- Relevance of Old Regime: Despite the new regime’s popularity, 28% of taxpayers still prefer the old regime due to its deductions and exemptions.
- Simplification vs. Benefits: The new regime simplifies tax compliance but may not be as beneficial for taxpayers with significant investments eligible for deductions.
Detailed Breakdown
1. Phase-Out of the Old Tax Regime
The government is contemplating a structured approach to gradually phase out the old tax regime, which has been in place for years. This change aims to streamline the tax system and encourage more taxpayers to transition to the new regime, which was introduced in FY21.
2. Adoption of the New Tax Regime
The new tax regime has been well-received, with 72% of taxpayers choosing it due to its lower rates. Currently, individuals earning up to Rs 3 lakh annually are exempt from income tax, while those earning between Rs 3 lakh and Rs 15 lakh are taxed at progressively higher rates.
3. Proposed Changes
The upcoming budget may propose:
- Increase in Basic Exemption: Raising the basic exemption limit from Rs 3 lakh to Rs 4 lakh.
- Revised Tax Slabs: Adjusting the first slab to cover incomes from Rs 4 lakh to Rs 7 lakh, thus benefiting a larger segment of the population.
4. Relevance of the Old Tax Regime
Despite the trend towards the new tax regime, the old regime remains relevant for around 28% of taxpayers who benefit from various deductions and exemptions. Taxpayers can claim deductions for:
- House rent allowance
- Home loan interest
- Health insurance premiums
- Contributions to the National Pension Scheme (NPS)
5. Simplification vs. Benefits
While the new regime simplifies tax compliance by reducing the need for eligible investments, it may not be as advantageous for those with significant tax-saving investments. The old regime offers various deductions that can lead to substantial tax savings, making it more attractive for certain taxpayers.
Important Details & Evidence
- The current tax slabs under the new regime are structured as follows:
- Rs 3 lakh to Rs 6 lakh: 5%
- Rs 6 lakh to Rs 9 lakh: 10%
- Rs 9 lakh to Rs 12 lakh: 15%
- Rs 12 lakh to Rs 15 lakh: 20%
- Above Rs 15 lakh: 30%
- Taxpayers with an income of up to Rs 7 lakh can avoid taxes under the new regime due to a standard deduction of Rs 75,000.
Final Takeaways
The Indian government is poised to make significant changes to the personal income tax landscape, potentially phasing out the old regime in favor of a simplified new regime. While the new system is gaining traction for its lower rates and reduced compliance burden, the old regime continues to serve a vital purpose for those who benefit from its deductions. As taxpayers await the Budget announcement, the focus will likely be on achieving a balance that maximizes benefits for all income groups while simplifying the overall tax structure.