Budget 2025: Income Tax Regime Changes Ahead
As the Union Budget approaches, taxpayers are eager to know what changes may come to the income tax regime. The key question on many minds is whether the government will completely eliminate the old tax structure. While the future remains uncertain, it is essential to analyze the current landscape of income tax in India. The new income tax regime, introduced in 2020, aimed to simplify the tax process by reducing deductions and exemptions. This article explores the implications of these changes and what they mean for individual taxpayers.
The Shift to the New Income Tax Regime
The new income tax regime was designed to provide a more straightforward tax structure. It aimed to attract taxpayers by lowering tax rates and eliminating numerous deductions. Initially, the uptake of this new regime was slow, with many taxpayers opting to stick with the old system. However, the Finance Act of 2023 made the new regime the default option, which led to significant changes. The government reduced tax rates further and introduced a standard deduction of ₹50,000 for salaried individuals. These changes encouraged more taxpayers to switch to the new regime.
By August 2024, reports indicated that 72% of taxpayers had opted for the new income tax regime for the financial year 2023-24. This shift suggests that the government’s efforts to promote the new structure have been somewhat successful. However, it is crucial to note that 28% of taxpayers still prefer the old regime. This group likely includes those who benefit from various deductions and exemptions, such as housing rent allowance (HRA) and home loan interest.
Understanding Taxpayer Preferences
Taxpayers can be broadly categorized based on their annual income. These categories include individuals earning up to ₹15 lakh, those with incomes between ₹15 lakh and ₹1 crore, high-net-worth individuals (HNIs) earning between ₹1 crore and ₹5 crore, and ultra-HNIs with incomes exceeding ₹5 crore.
Category A, which consists of younger salaried individuals, may prefer the new regime due to its simplicity and reduced documentation requirements. Conversely, ultra-HNIs benefit from the capped maximum marginal rate (MMR) of 39% in the new regime, which is lower than the 42.74% in the old regime. For these two categories, the new income tax regime appears to be the better option.
However, the middle-income groups, particularly those in Categories B and C, often find the old regime more appealing. These individuals typically have significant expenses related to housing, education, and medical care. They also tend to make charitable donations. The deductions available in the old regime can lead to substantial tax savings, making it a more attractive option for them.
The Case for Retaining the Old Regime
The ongoing debate about whether to scrap the old income tax regime entirely raises important questions. Many taxpayers rely on the deductions and exemptions provided under the old system for their financial planning. The standard deduction available in the new regime does not adequately address the rising costs of living and other expenses.
If the government were to eliminate the old regime, it could negatively impact various sectors that benefit from taxpayer spending. For instance, tax deductions for home loans and insurance premiums were introduced to stimulate these industries. Removing these incentives could hinder their growth and affect the financial well-being of taxpayers who rely on them.
Given these considerations, it may be unwise for the government to rush into scrapping the old income tax regime. Instead, a phased approach could be more beneficial. The government could announce a roadmap for transitioning to the new regime while offering incentives to encourage taxpayers to make the switch voluntarily.
Observer Voice is the one stop site for National, International news, Editor’s Choice, Art/culture contents, Quotes and much more. We also cover historical contents. Historical contents includes World History, Indian History, and what happened today. The website also covers Entertainment across the India and World.
Follow Us on Twitter, Instagram, Facebook, & LinkedIn