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Since both the old and new tax regimes have pros and cons, it becomes difficult for taxpayers to choose between them. Starting April 1, 2020 (FY 2020-21), the Indian government implemented a new alternative tax rate regime for Hindu Undivided Families (HUF).
As a result, Section 115BAC of the Income Tax Act of 1961 (the Act) has been implemented, which mandates reduced tax rates for individual taxpayers and HUFs who opt-out of certain tax deductions or exemptions.
The Central Board of Direct Taxes granted a one-time relaxation to verify e-filed ITRs for the assessment year (AY) 2020-21 that were awaiting verification owing to non-submission of the ITR-V form or outstanding e-verification on December 28. To get a clear picture of these changes, let us look at the difference between the old and new tax regimes.
Under the applicable parts of the Income Tax Act, some financial instruments are eligible for tax deductions (life insurance policies under as per Section 80C). It pushes you to save and insure while lowering your tax bill. Furthermore, Section 10 of the Act excludes some incomes from taxation to reduce tax payments.
Some adjustments have been made because of the new tax plan. There were 120 possible exemptions under the old tax regime. The new tax regime has abolished 70 of them while keeping 50.
The following are some of the well-known exemptions and deductions that have been eliminated under the new tax scheme:
Similarly, here are some common exemptions which will be preserved under the new tax system.
Individual taxpayers had the opportunity to choose between the old and new tax regimes for the first time when filing their income tax returns in FY 2020-21.
As every taxpayer has different qualifying deductions, sources, and income, one rule does not apply to everyone. Taxpayers must assess and contrast the tax liability under both systems before deciding which to choose.
Suppose a taxpayer has investments in tax-saving instruments, pays life or medical insurance premiums, children's school fees, home mortgage principal repayment, and takes advantage of the HRA, LTA, and other deductions. In that case, it may be more helpful to opt for the old tax regime because the benefit of deduction/exemption is available.
The government has taken several initiatives to simplify the tax system in recent years. India still maintains one of the highest taxes ratios relevant to individual taxpayers, with a top rate of 30% and a top surcharge of 37% on income surpassing five crores.
As a result, once the government examines expanding the tax slabs to balance the impact of waiving certain deductions or exemptions, there is scope to render the new tax regime more appealing to a more significant percentage of individual taxpayers.
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