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Budget 2023 income tax: Why concessional tax regime is not popular among taxpayers; 3 steps needed

Budget 2023 income tax expectations: The concessional tax regime (“CTR”) was introduced in the Budget 2020 (effective form FY 2020-21) with an intent to do away with a host of exemptions and deductions under the Income Tax Act, 1961 (“Act”) in order to reduce the compliance burden for individual taxpayers as also the administrative burden for employers and tax authorities. It was also inferred as a first step for eventually moving towards a tax regime of low/moderate tax rates without exemptions & deductions.
The CTR provides individual taxpayers with an option to pay taxes at reduced slab rates by forgoing certain deductions and exemptions which are otherwise available under the existing tax regime. A comparison of the slab rates under both regimes is enclosed.

Why isn’t the CTR popular/widely opted for by individual taxpayers?
Though the tax rates under the CTR are lower as compared to the existing regime, however, basis the number of taxpayers opting for the CTR, one can infer that the reduction in tax rates is not attractive enough for individuals to forego their exemptions and deductions. For instance, take the case of an individual with an annual income above Rs 15,00,000, the CTR is only beneficial if the combined exemptions and deductions not allowable under CTR are less than Rs 2,50,000.
If one were to consider only some of the basic exemptions and deductions (amongst others) availed by most salaried individuals in India i.e., 80C, 80D, standard deduction (Rs 50,000) and HRA exemption – these would in most cases add up to much more than Rs 2,50,000 thereby making the CTR academic. This is explained by way of the table below:

The threshold of Rs 2,50,000 worth of deductions and exemptions (discussed above) further reduces as the annual income reduces below Rs 15,00,000. e.g., For an individual having an annual income of Rs 7,50,000, the CTR is beneficial only if the combined exemptions and deductions (which they give up under the CTR) are less than Rs 1,25,000 (which in most taxpayers is not the case given the increased awareness and adoption by Indians towards insurance products (health and life) and investments – PPF, ELSS, etc.).
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How can the CTR be made more effective?
1. Change in slab rates under CTR as provided below:

2. Retain the standard deduction of Rs 50,000 under the CTR
3. Introduce a combined deduction of up to Rs 2,50,000 in the CTR under the following:

  • 80C – Provident fund (including PPF) & qualifying life insurance products (To clarify, while the current scope of section 80C is very wide and covers a gamut of insurance savings, expenditure, etc., under the proposed CTR, its scope may be reduced to PF/PPF and qualifying life insurance products)
  • 80CCC – Pension policies
  • 80CCD(1)/(1B) – Employees / self-contribution to NPS
  • 80D – Mediclaim Insurance
  • Interest on housing loan

The rationale for retaining the above is the absence of a universal social security benefit to all citizens of India, regardless of the level of income in view of which middle- and high-income earners need to provide for their own security.
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However, finally, the call of the day may be to gradually shift towards a unified tax regime with lower tax slab rates and specific/pertinent exemptions and deductions (instead of having two different tax regimes) which will go a long way in reducing the compliance and administrative hassles for both taxpayers and the tax authorities.
(Surabhi Marwah is Tax Partner – People Advisory Services at EY India. Uday Bhartia, Senior Tax Professional, EY India contributed to the column. Views are personal)

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