4 ways to make new tax regime more attractive

The financial year 2020-21 marked a significant shift in India's tax system with the introduction of a new tax regime. Individual taxpayers were given a choice: continue with the traditional system, rich in exemptions and deductions, or opt for a new regime with lower rates and fewer exemptions and deductions.

By FY24, measures such as fewer tax slabs, higher rebate, availability of standard deduction and reduced surcharge for higher income brackets were introduced to make the new tax regime more attractive.

Here are a few suggestions to make the new tax regime more attractive so that more income taxpayers move to the regime and stay with it - eventually paving the way for one regime for all.

1. Revamped tax slabs and rebate:

The current basic exemption limit under the new tax regime is Rs 3 lakh. However, with the availability of a full rebate of Rs 25,000, there is effectively no tax for individual taxpayers with annual taxable income of Rs 7 lakh, opting for the new tax regime. The finance minister could consider increasing the basic exemption limit to a minimum of Rs 5 lakh. Govt may also consider offering a full rebate for taxable income up to Rs 10 lakh - up from the existing threshold of Rs 7 lakh. These proposals will nudge several taxpayers to move from the old regime to the new.

2. Higher standard deduction for salaried employees:

Government could propose doubling the standard deduction (currently Rs 50,000) only for those opting for the new tax regime. By increasing the standard deduction from Rs 50,000 to Rs 1,00,000 exclusively for those opting for the new tax regime, govt can reduce taxable income, thereby easing the tax burden on millions of individual taxpayers.

3. Special treatment for NPS:
Currently, there is parity provided for the deduction for employer's contribution to National Pension System under both the new and old tax regimes. The deduction is up to 10% of the salary (basic plus dearness allowance). However, if an individual makes a contribution to NPS on his own, the deduction for his contribution is only available under the old tax regime, up to a maximum of Rs 50,000. Considering govt's emphasis on encouraging investments in NPS over traditional instruments, it would be prudent to allow the deduction towards self-contribution to NPS under the new tax regime too.

4. Deduction for interest on home loan for self-occupied property:

Deductions and exemptions have been integral part of tax planning. These include deductions for interest paid towards home loans for self-occupied property, exemption on house rent allowances, benefits under Section 80C -which includes investments like PF and PPF - as well as deductions for contributions towards medical insurance premiums under Section 80D. These are, however, only available under the old regime.

Considering that a large number of taxpayers avail a home loan, the availability of deduction for interest paid towards housing loans taken from a financial institution for a self-occupied property can be made available under the new tax regime. Currently, this deduction is available under the new regime for a let-out property. Also, the existing threshold of Rs 2 lakh was last enhanced 10 years ago. The coming Budget could increase this limit to Rs 3 lakh. Such a measure will acknowledge the housing related expenses of a taxpayer. It will also provide impetus for growth in the realty sector.

(The writer is partner, EY India; Rajesh Sureshan, director, EY India, also contributed to the article. Views expressed are personal)

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