Reasons Why Fewer Tax Payers Are Opting for The New Tax Regime

Budget 2020 introduced a new tax regime which became applicable from 1st April 2020. The new tax regime has stark differences from the old regime. The new tax regime has led to several new income tax slab rates and the removal of several tax exemptions and deductions. The Centre has given taxpayers the choice to select between the old and the new tax regime, depending on the financial benefits each tax regime offers to the taxpayer. As the assessment year 2021-2022 was the first time individuals could make a selection between the two regimes, it was observed that the new tax regime was opted by relatively fewer people. A large number of taxpayers have chosen to stick by the old regime.

This article aims to understand the reasons behind why this could be so.  

What are the primary differences between the two regimes? 

First, let us understand what distinguishes one tax regime from the other. The old tax regime offers four tax slabs with high tax rates; the new tax regime offers six tax slabs with lowered tax rates for each slab. The tax rates for the initial tax slabs have been reduced under the tax regime. 

New income tax slab rates have been introduced for individuals with an annual income of Rs. 10 lakhs and Rs. 15 lakhs, with those earning in the range of Rs.10-12.5 lakhs being expected to pay tax at the rate of 20%. Those earning annually in the range of Rs.12.5 – 15 lakhs will pay income tax at the rate of 25% and those with an annual earning of Rs.15 lakhs and above will be charged income tax at the rate of 30%.

Reasons people may be sticking with the old tax regime

Scraping of important deductions and exemptions

Considering the reductions in tax rates, one might assume that the chances of taxpayers opting for the tax regime would be higher. However, the new tax regime has also led to the scraping of around 70 deductions and exemptions that a taxpayer could claim and save on tax. Some major ones excluded from the tax regime include: leave travel allowance, standard deduction of up to Rs.50,000 for salaried taxpayers and pensioners, allowance for children’s education, house rent allowance, deduction on entertainment allowance and professional tax for government employees, tax breaks and deductions on several investment avenues, and so on.

For an individual earning around Rs. 15 lakhs or above, the tax rates under both regimes are the same. Opting for the new regime may not seem like a viable option to them, as they may end up losing on major tax-saving deductions while still being charged the same tax rate as earlier. Regardless of the regime one may be choosing, it is important to fill the right ITR from the many types of ITR available.

Investments in tax-saving instruments already underway 

Many people who have purchased or invested in financial instruments with the goal of saving tax may want to stick with the old regime. This is highly applicable for those who have purchased or have been investing in tax-saving instruments for years. Since these investments were done with the intention to save on tax, opting for the new regime could lead to these instruments becoming a liability in the case due care is not given. 

Lack of awareness and prioritization of security 

Paying tax can be an intimidating experience, especially for first-timers. There are multiple income tax slabs and their rates, several types of ITR to choose from, and now, two tax regimes. There is a possibility that many individuals who may not have the time to research or the money to consult advisors may be opting for the old tax regime out of familiarity and security. Additionally, many organisations are not yet equipped to deal with twice the type of paperwork and tax complexities. 

If you are finding it difficult to navigate the tax regimes and get an idea of how much you may be taxed for a particular year, you should use the income tax calculator tool. After you have added details such as your age, your incomes and interests, and the deductions and exemptions you are eligible for, the income tax calculator gives you an approximate figure. 

It is advised to consult a tax expert or a financial consultant before going ahead with any major financial decisions. 

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