The new income tax regime announced by Finance Minister Nirmala Sitharaman could annually cost Rs 40,000 crore, money that is expected to stay in the hands of taxpayers. Sitharaman, who presented her budget proposals for 2020-21 in the Lok Sabha, told the Lok Sabha that the new scheme would be optional for taxpayers.
People can opt to be taxed at lower rates under the new income tax regime on the condition that they forgo permissible exemptions and deductions under the existing tax slabs. Or they can continue to pay taxes under the existing tax rates.
Nirmala told parliament that the government had proposed to remove 70 of more than 100 income tax deductions and exemptions to simplify the tax system and lower tax rates.
The Income Tax Act is riddled with various exemptions and deductions which makes compliance with tax payers and administration of IT Act by tax authorities a burdensome process, Sitharaman said. This makes it almost impossible for taxpayers to comply with the tax law without taking the help from professionals.
Experts say that the new tax regime will largely benefit middle class taxpayers who have a taxable income upto Rs 15 lakh.
A person earning Rs 15 lakh per annum under the new tax regime will have to pay Rs 1.95 lakh tax in place of Rs 2.73 lakh, a saving of about Rs 75,000.
“In order to provide significant relief to individual taxpayers and to simplify the income tax law, I propose to bring a new simplified personal income tax regime wherein income tax rates will be significantly reduced for the individual taxpayers who forgo certain deductions and exemptions,” she said.
Under the new regime, an individual will be required to pay tax at the reduced rate of 10 per cent for income between Rs 5 lakh to Rs 7.5 lakh against the prevailing rate of 20 per cent.
For people with income between Rs 7.5 lakh to Rs 10 lakh, he or she will pay at the reduced rate of 15 per cent only against the current prevailing 20 per cent. Similarly, for income between Rs 12.5 to Rs 15 lakh, the prevailing rate is 30 percent. That is now being brought down to 20 per cent.
Income above Rs 15 lakh will be continued at 30 per cent without exemptions.