Two sides of the new income tax system

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By Shivanand Pandit

The admirable words of American writer, LH Anderson, “Be careful what you wish for, there’s always a catch,” applies to the taxpayers of India. Keeping the demand of taxpayers in mind, the Finance Minister had announced a new tax system during Budget 2020. The new system did away with superfluity of tax slabs and gave taxpayers a choice between the new and the existing regime.

The choice is left tax payers confused. It has also made complying with the tax laws more complex than seamless.

As the determination of tax liability and tax deducted at source (TDS) is different in the existing and new income tax system, depending on the gross income and amount of tax-saving investments or deductions, selecting the right regime is very vital to avoid the excessive tax outgo. Lockdown restrictions are making it difficult to reach out to the tax consultants with the result that, residents are clueless on whether to select the old or new income tax system.

The new scheme has seven slabs compared to four slabs in the old scheme. Taxpayers need not to pay tax on income up to 2.5 lakh rupees. They have to shell out five per cent on income between Rs 2.5 lakh- Rs 5 lakh, 10 per cent on income above Rs 5 lakh- Rs 7.5 lakh, 15 per cent on income above Rs 7.5 lakh rupees to Rs 10 lakh rupees, 20 per cent on income above Rs 10 lakh rupees to Rs 12.5 lakh rupees, 25 per cent on income above Rs 12.5 lakh rupees to Rs 15 lakh rupees and 30 per cent on income above Rs 15 lakh rupees.

Tax slab rates of the new system are not distinguished on age unlike the old system where the basic income threshold exempt senior citizens from tax and super senior citizens (above 80 years)  with income between Rs  3 lakh and Rs 5 lakh respectively.

Individuals not having business income can select between old or new system each year. So, they may exercise more useful option after vigilantly evaluating each financial year. Individuals having business income can exercise the option only once and that shall be conclusive.

Individuals having salary have to choose between old and new schemes at the time of making their tax declaration to employer for the purpose of deducting tax at source. However, even if any individual chooses one option at the time of making declaration to employer, he or she is free to alter the option and choose another one, at the time of filing the income tax return.

New vs Existing

The new system offers concessional tax rates compared to the existing regime. Maintenance of plethora of documents is not required as most of the exemptions and deductions have been done away with. The new system treats all taxpayers equally. This is beneficial to the taxpayers who do not want to make tax-savings investments which have lock-in period. The reduced tax rates of the new system would provide more disposable income to the taxpayer. In addition, taxpayers can customize their investment decisions under the new system.

The existing system restricts the investment choices for the taxpayer as he or she has to make the investments only in the instruments specified. However the tax payers loses out on exemptions and deductions which are plenty. Such as leave travel concession, HRA, benefits specifically granted to meet expenses incurred in performance of duties of office or employment, benefits granted to meet personal expenses in performance of duties of office or employment or to compensate for increased cost of living, standard deduction, entertainment allowance, professional tax, interest on home loan, deduction on family pension, etc.

Which is the right choice?

Unluckily there is no single answer to the above query. And the biggest culprit again is the convolution and complexity of the Indian tax structure. Apparently, the reduced tax rates of the new scheme should result in lower taxes. But the removal of exemptions and deductions has proven that the advantage of lower tax rates is insignificant and worthless.

People who invest in various instruments to claim tax reliefs will not find the new regime attractive. The old scheme is advantageous for the taxpayers claiming total deductions or exemptions. Therefore, if substantial amount of tax breaks were being availed by the taxpayers, it would be safer to be part of the old scheme.

Taxpayers eyeing to satisfy various financial compulsions, such as wealth creation through investments in tax-saving instruments, paying premiums to take care of insurance needs, paying children’s tuition fees, paying equated monthly installments of an education loan, buying a house with a home loan etc. the older regime still works in their interest. Taxpayers having no home loan, staying in rent-free accommodation and desiring to make small or no investments may find the new scheme advantageous.

Finally all the changes introduced do not categorically make better for the taxpayer. Although the Finance Minister mentioned that the new tax system will boost consumer demand, it could come at a heavy cost in the form of poorer household savings. The discretionary tax structure endangers a prominent concept that goaded taxpayers of India to save money for the future.

Taxpayers will have to do a comparative assessment of both schemes before taking the final decision. Since the new system has many tricky provisions, taxpayers have to consult an expert who can recommend the ideal route.

The writer is a tax specialist, financial adviser, guest faculty and public speaker based in Goa. He can be reached at panditgoa@gmail.com