In order to increase the popularity of the new exemption-free income tax regime, the Finance Ministry, for the upcoming Union Budget 2023-24 (FY24), undertook a review to find ways to boost the adoption of the scheme. Fewer than half a million taxpayers out of 75.2 million who filed income tax returns for the current assessment year opted for the new regime.
The new income tax system offers a range of lower tax rates, with the highest rate of 30% applied to incomes above Rs 15 lakh. In contrast, the traditional system with exemptions has three tax brackets (5%, 20%, and 30%), and the highest rate is imposed on incomes over Rs 10 lakh.’
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Officials are currently evaluating the new income tax regime to identify ways to increase its adoption. One proposal being considered is to increase the income threshold for taxation from Rs 2.5 lakh or to adjust the tax brackets to lower the overall tax burden. Another option is to allow for a limited number of deductions, such as for health insurance or housing expenses, according to a report in Economic Times.
Finance ministry officials have previously acknowledged the need to improve the new tax regime to increase its acceptance. This sentiment was echoed by Bibek Debroy, the chairman of the Economic Advisory Council to the Prime Minister, in a recent interview.
He said that “people have not volunteered that much for the exemption-less system, which means one needs to look at this and figure out some ways to incentivize this,” and suggested one way to do this would be by introducing different tax rates for the two regimes.
Tax experts suggest that for many individual taxpayers, the effective tax liability after claiming all deductions under the old tax regime turns out to be lower, and that is why many have not switched to the new system.
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To make the new tax regime more appealing, they suggest that the tax slab rates should be revised upwards to encourage people to opt for the simplified system and eventually do away with tax deductions, which can complicate the overall tax system and add to the administrative burden for employers, employees, and the tax department.
