In the long term, a taxpayer would actually end up paying a higher tax amount in the new scheme than in the old scheme.
On Saturday, the Ministry of Finance announced a new, simplified tax revenue regime for taxpayers.
"The Income Tax Act is currently riddled with various exemptions and deductions that make taxpayer compliance and the administration of the Income Tax Act a burdensome process by the tax authorities," Finance Minister Nirmala Sitharaman said in her speech on the budget.
Individuals and Hindu Unified Families (HUF) have the option of paying tax on reduced rates without exemptions as per the new regime.
The new rates as proposed by the Finance Ministry are 5 per cent for an income from ₹2,50,001 to ₹5,00,000, 10 per cent for income ranging from ₹5,00,001 to ₹7,50,000, 15 per cent for income slab of ₹7,50,001 to ₹10,00,000, 20 per cent for income between ₹10,00,001 to ₹12,50,000 and 25 per cent for individuals and HUF with income between ₹12,50,001 to ₹15,00,000. Individuals and HUF earning more than 15,00,000 are liable to pay income tax of 30 per cent. People with income below 2,50,000 are exempt from paying the tax.
Here's the catch, the regime under which taxpayers would like to file their taxes is up to taxpayers. It actually taxes picking up the tax regime that provides taxpayers with maximum tax benefits.
In theory, the new regime may seem attractive to taxpayers with lower rates and lesser complications. However, given the overall tax benefits that a person may take advantage of under current exemptions and deductions, they will pay a higher overall tax amount under different slabs.
Differences in taxable income taking into account common exemptions.
Even with a higher tax rate, taking into consideration the most common deductions and exemptions, a taxpayer will pay a lower overall tax amount as per the old regime.
"Considering some of the most common exemptions exercised under the current tax regime, a common taxpayer will end up paying more as per the new regime," says Ravi Tanna, a Rajkot-based Chartered Accountant.
Tanna said, "These calculations include the three most common means a taxpayer adopts to reduce his tax liabilities including housing loans, investments such as EPF, ELSS, insurance plans, fixed deposit payments, etc., and medical insurance under 80D."
According to Tanna's calculations, with the maximum amount of tax liabilities reduced by interest in housing loans, exemptions below 80C and 80D, as per the old scheme, an individual will end up paying about 37,500 more if they choose to go with the new scheme.
"If under the old regime we were to consider every single exemption, the tax benefit incurred would have to be analyzed on a case-by-case basis," he further stated. "The new regime may seem preferable to some, particularly for first time taxpayers, given the simplified nature of the tax slabs.The immediate cash-flow for taxpayers is another important aspect to consider when comparing the two regimes. We must consider the cash crunch caused when money is invested in different schemes to avoid tax liability in order to take advantage of the benefits of the old regime which in theory leads to a lower payable tax amount.
After a year when they file their returns, the taxpayer takes advantage of those investments. Consequently, the new scheme may seem attractive to some as they only pay the tax amount each month compared to having their money blocked for a year in investments.
"However, in the long term, considering the deductions and exemptions provided under the old regime, a taxpayer would actually end up paying a higher tax amount in the new regime as compared to the old one," Tanna said.
As provided in the old regime, the government has removed over 70 exemptions and deductions from over 100 exemptions and deductions. It will look into the remaining means in the future to reduce tax liability.
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