Officials of North Block, headquarters of the Union finance ministry, are exploring the possibility of increasing the tax-free slab to Rs 5 lakh in the two-year-old alternative personal income tax regime. It is important to mention in this context that as per the current tax laws, an individual is required to pay tax in case his taxable income in India surpasses the basic exemption limit. The general exemption limit is Rs 2.50 lakh per year.
Many experts are of the view that the cost of living has gone up due to sticky inflation while the tax burden remains unchanged. And it is high time to slash the rates of personal income tax in a bid to increase disposable income and revive the demand cycle. More importantly, the last full budget of the National Democratic Alliance (NDA) government’s second tenure is likely to give some respite to the salaried class via the rationalisation of rates.
Citing an unnamed government official, the Business Standard reported that raising the limit will cut the tax outgo for assessees, thus leaving more money with them to make suitable investments. At present, very few taxpayers have opted for the alternative tax regime. If taxpayers take advantage of tax exemptions such as Section 80C and Section 80D, then the tax liability in the old personal income tax system comes down.
However, there is no benefit of any kind of deductions in the alternative tax structure. Up to Rs 5 lakh a year is tax-free. Taxpayers get a rebate for the tax that accrues in the Rs 2.5-5 lakh slab. “Those earning up to Rs 5 lakh shall not pay any tax either in the old regime or in the new regime,” Finance Minister Nirmala Sitharaman said in 2020.
The issue came for discussion during the ongoing Budget exercise and the departments concerned had been asked to recommend ways to improve the system. “The Budget exercise on taxes will start next week and we shall look into the possibility of such tweaking in the new regime,” the financial daily quoted the official as saying.
The official, however, went on add that while considering any such move, it must be seen how much this change will affect the total revenue and whether the government has the scope to do that.
Further, he mentioned that a preliminary estimate of the revenue impact had been done on increasing the tax net under the new regime made and that may be sent to the Budget makers for consideration, adding that there may be a discussion on whether both the old and new regimes of personal income tax required to be changed.
Income Tax Slabs: Old vs New
| Old Regime | New Regime |
| Income Tax slabs (Rs) (with exemptions and deductions) | (without exemptions and deductions) |
| Up to 2.5 lakh (Nil) | Up to 2.5 lakh (Nil) |
| 2.5-5 lakh (5%) | 2.5-5 lakh (5%) |
| 5-7.5 lakh (20%) | 5-7.5 lakh (10%) |
| 7.5-10 lakh (20%) | 7.5-10 lakh (15%) |
| 10-12.5 lakh (30%) | 10-12.5 lakh (20%) |
| 12.5-15 lakh | 12.5-15 lakh (25%) |
| Above 15 lakh | Above 15 lakh (30%) |
| Data: HDFC Bank website |
In the Budget 2020-21, the new regime of alternate personal income tax slabs with a lower rate of tax was introduced as an option. However, estimates demonstrated that only 10-12 per cent of the taxpayers had chosen it because of higher tax liability as compared to the old system. Also, there is a discussion on reforms in direct taxes, including restructuring capital gains tax.
Tax experts are of the opinion that if the tax liability is the same in the new and old regimes then most taxpayers may opt for the new regime as it will reduce the burden of tax compliance.
Last month, India’s top industry body Confederation of Indian Industry (CII) suggested a review of the personal income tax (old regime) rates. It has proposed nil tax up to Rs 2.5 lakh and a cutting of the rates between Rs 2.5 lakh and Rs 5 lakh to 2.5 per cent from 5 per cent.
