Why New Income Tax Regime is Government Favourite Child!; Let’s Find Out

As an Indian taxpayer, we need to follow the changes happening in Tax regime from past few years and recently.

Since its announcement, the new tax regime proposed in the Union Budget 2020 has been the talk of the town. The new tax regime has caused substantial changes in the way we calculate our taxes, leaving many taxpayers perplexed. In this article, we’ll talk about India’s new tax regime, compare it to the old income tax regime, and explain why the new regime is the government’s favourite child.

Introduction of New Tax Regime in India

The new tax regime implemented in India is a voluntary tax regime. The administration has given taxpayers the option of choosing between the old and new tax regimes. The new tax regime offers reduced tax rates, but it has eliminated most of the old tax regime’s exemptions and deductions. The government wants to streamline the tax system and help middle-class taxpayers who don’t have numerous deductions or exemptions.

Understanding Old Income Tax Regime

The old income tax regime has been in place in India for many decades. Under the old tax regime, taxpayers may claim a variety of deductions and exemptions to assist decrease their tax payment. Sections 80C, 80D, and 24 are some of the most popular tax deductions. These deductions and exemptions are available to taxpayers in order to lower their taxable income.

Old and New Income Tax Regime’s Comparison

The new tax regime has lower tax rates but has eliminated most of the old tax regime’s exemptions and deductions. Except for the standard deduction and leave travel allowance, taxpayers who choose the new tax regime cannot claim any tax deductions or exemptions. The old tax regime had four tax slabs, but the current tax regime has seven. For certain income levels, the new regime’s tax rates are lower than the old regime’s.

For example: The current incentives tend to contradict the principles of equality and efficiency while not generally increasing macro-savings. As a result, the continuation of various tax breaks on various financial assets required reconsideration, and the budget made the correct decision by making the new tax regime the default choice. In terms of tax treatment, the new tax regime differentiates between long-term and short- and medium-term savings. Furthermore, the government’s proposal to make NTR the default tax regime complements the government’s effort to digitise and simplify the tax procedure for individuals.

This would also necessitate considerable modifications in employers’ payroll practises for salaried taxpayers.

According to the paper, there should be a clear differentiation between long term (more than 5 years) savings and short/medium term (up to 5 years) saves for tax purposes because the implications are different.

Under the Indian tax system, there are three types of financial instruments: deductions, exemptions, and tax rebates.

According to him, the current tax framework favours short-term investments over long-term investments, which impose a cost on the economy. The new tax regime will address the problem of the tax regime by acting against arbitrage opportunities and preserving the economy from financial resource misallocation.

Another unintended effect of the old tax regime is that where concessions take the form of deductions from income, as in Section 10, Section 80L, and laws relating to capital gains tax rollover, upper bracket taxpayers benefit disproportionately.

New Income Tax Regime Benefits

For taxpayers who do not have many deductions or exemptions, the new income tax regime offers several advantages. Lower tax rates may be available to taxpayers who choose the new tax regime. The new tax regime has lower tax rates for certain income brackets, which might assist taxpayers minimise their tax burden. The new tax system has also been simplified, making it easier for taxpayers to file their tax returns.

What deductions and exemptions are available under the New Income Tax Regime? Except for the standard deduction and leave travel allowance, taxpayers who choose the new tax regime are not allowed to claim any tax deductions or exemptions. The standard deduction is a flat deduction of Rs. 50,000 available to all taxpayers, whereas the leave travel allowance is only available to salaried personnel.

How to Choose Right Tax Regime for Yourself

The best income tax regime for you is determined by your unique circumstances. Taxpayers who have a lot of deductions and exemptions should stick with the old tax system because it allows them to claim all of their deductions and exemptions. Taxpayers with little deductions or exemptions should choose the new tax regime because it has lower tax rates. Before making a decision, you must evaluate your tax due under both regimes.

Challenges under New Income Tax Regime

The new income tax regime brings many challenges. Taxpayers who choose the new tax regime cannot claim the majority of the deductions and exemptions available under the old tax regime. Taxpayers who have several deductions and exemptions may end up paying more tax under the new tax structure. The new tax regime may also be unsuitable for taxpayers who have invested in tax-saving instruments such as the Public Provident Fund or the National Pension System.

Conclusion: Why New Tax Regime is Favourite Child?

The new tax regime is the government’s favourite child since it streamlines the tax system and delivers relief to middle-class taxpayers. The new tax regime features lower tax rates, which might help reduce the tax liabilities of taxpayers who do not have significant deductions or exemptions.

However, before choosing for the new tax structure, taxpayers must carefully consider their unique circumstances. To make an informed conclusion, you must assess your tax due under both regimes.

To summarise, the new tax regime proposed in the Union Budget 2020 represents a significant change in the Indian tax system. It resulted in lower tax rates, but it also eliminated the majority of the exemptions and deductions available under the previous tax regime. Before deciding on the new tax structure, taxpayers must consider their personal circumstances.