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The new income tax system should be made more appealing.
Smt. Nirmala Sitharaman, the Finance Minister, added Section 115BAC into the Income-tax Act in the Union Budget 2020, allowing an individual or HUF to choose an alternative tax system. If key exemptions and deductions are forsaken, this alternative tax regime allows for lower tax rates. Even after promising lower tax rates, this new system fails to entice taxpayers. Non-residents have benefited more from this regime because they are not entitled to significant deductions and exemptions.
The salaried class will no longer be entitled to the normal perks and exemptions such as Leave Travel Concession, House Rent Allowance, Standard Deduction of Rs. 50,000, and so on under the new system. They are unable to deduct mortgage interest and most standard deductions such as Section 80C, Section 80D, Section 80G, and Section 80TTA. To summarise, taxpayers who opt out of certain deductions and exemptions might benefit from lower income tax rates. It’s a scheme that’s conditional. In the old regime, there were four tax slabs, whereas there are seven in the new regime. For income surpassing Rs. 15 lakhs, both regimes continue to apply a 30 percent tax rate.
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Indian taxpayers frequently invest in Section 80C tax-saving solutions in order to save money for retirement. In addition, following the COVID-19 outbreak, people have realised the value of medical insurance, which is deductible under Section 80D. Because these investing and savings tools are so common among taxpayers, they are eligible for deductions, which are no longer available under the new regime. The reliefs and exemptions that are lost in the alternative system offset the tax savings.
The new government appears to be more concerned with encouraging Indians to spend than than save. For this, the government must implement social security plans to encourage Indians to abandon their savings habits and spend more in order to live a respectable life with all of life’s amenities at a younger age.
The choice between two regimes is based on the specifics of each situation, and there is no one-size-fits-all solution. To determine whether option is more advantageous, taxpayers must calculate their tax liability under both scenarios. It must be determined based on the taxpayer’s income level, tax savings investments, deductions, and exemptions. Taxpayers who have a greater number of deductions and exemptions may continue to pay tax under the old system.
Many people have turned to the stock market in addition to their professions as a result of the COVID-19 pandemic and the work-from-home culture. Futures and Options (F&O) trading profits and losses are always taxable under the heading ‘Profits and Gains from Business or Profession.’ As a result, they become taxpayers with a wage and a business.
People with a company income are unable to switch to a different regime every year. The option can only be used once in the first year, but it is valid for all subsequent assessment years. To opt for the new system, they must submit Form 10-IE. In the case of persons with income from a business or profession, the ‘opt out’ from section 115BAC is only available once. He will also be ineligible to use the option under the section again unless he stops to carry on his business or profession after he opts out. As a result of these circumstances, business taxpayers are less likely to support the new system.
It is difficult for the average taxpayer to comprehend all of the nuances of tax law. As a result, the Finance Minister should make the parameters of the new system easier to understand so that taxpayers can select between the two possibilities. Furthermore, the new regime’s limits should be eased to allow taxpayers to claim at least common exemptions and deductions, making the new system more appealing to them.