Here’s why there is less adoption of the new tax regime and how budget 2022 can make it more attractive

• The old tax regime offers tax benefits and the new tax regime offers a lower tax rate with almost no tax deductions.
• Availability of no tax deduction made the new tax regime unattractive.
• Here are what experts are suggesting to make the new tax regime more appealing.

In last year’s union budget, India’s finance minister Nirmala Sitharaman had announced a new tax regime with low income-tax rates for individuals. But it was suitable for those who were willing to forgo deductions and exemptions.

The new tax regime does not allow 70 tax exemptions and deductions including house rent, leave travel allowance, children’s education allowance, benefits from section 80C (allows tax deduction up to ₹1.5 lakh from investments made), 80D (allows tax deduction from insurance) and home loan interest deduction.

Reportedly, only 10% of the taxpayers who filed returns through ClearTax (now Clear) portal have opted for the new regime.

Industry watchers also observed that there are less takers for the new tax regime as taxpayers stuck to the old one with several tax deductions.

Under income tax deductions, a taxpayer can reduce their overall taxable income and tax exemptions help exclude a specific amount of taxable income.

As notified by the income tax department, one needs to file the income tax returns using the additional form i.e., Form 10-IE, for selecting a new tax regime.

“We still see a majority of the people sticking to the old tax regime. There are two reasons for that -- it was only feasible for two kinds of people; one is either you are in a really lower income group, where you don't have liquidity to invest in some of the schemes that section 80C gives you like PPF [public provident fund], or insurance. So for them the new scheme makes sense. Secondly, if the overall benefits were higher than ₹75,000, there actually the new tax regime does not make sense,” said Aarti Desikan, executive director, private wealth management at Anand Rathi Securities.

Under the new tax regime, the maximum tax benefit one can get is ₹75,000 in a year.

Taking the rising inflation into account, taxpayers are hoping for some more additional tax deductions from the budget, says Desikan.
Note: Advance tax is paid when an individual’s tax liability is more than ₹10,000 in a financial year.

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