Centre mulling over reducing income tax rates under new regime
The central government is mulling over lowering income tax rates in order to make the new direct tax regime more attractive, as per a report by Reuters. The revised tax slabs could be introduced in the upcoming Union Budget, due on February 1. Although the finance ministry hasn't confirmed it, the final decision in this regard rests with the Prime Minister's Office (PMO).
Why does this story matter?
- The country's middle class expects the income tax limit will be raised in the upcoming Union Budget, which would provide them some relief.
- Recently, Finance Minister Nirmala Sitharaman claimed that she belonged to the middle class and understood their financial pressure.
- The new income tax regime was introduced in 2020 with lower tax rates and fewer deductions and exemptions to make tax compliance easier.
Currently, income tax begins at annual income of Rs. 2.5L
Currently, a total income of Rs 2.5-5 lakh is taxed at 5%, while Rs. 5-7.5 lakh attracts a 10% tax. Moreover, an income of Rs. 7.5 lakh to Rs. 10 lakh is taxed at 15%, Rs. 10 lakh to Rs. 12.5 lakh at 20%, Rs. 12.5 lakh to Rs. 15 lakh at 25%, and 30% on an annual income above Rs. 15 lakh.
Individuals can choose their tax rates
Notably, citizens can choose which rates they want to be taxed under. The government aims to make people gradually shift to the new tax regime with no exemptions/deductions, Bibek Debroy—Chairman of the PM's Economic Advisory Council—said earlier. Though the new regime aims at making tax compliance easier, experts say that it isn't very attractive as it doesn't allow exemptions on house rent and insurance.
New tax regime hasn't gained much traction
The Reuters report says that the Finance Ministry is likely to reduce the 25% and 30% tax rates under the new regime. Currently, under the new tax regime, the tax slab of Rs. 5-7.5 lakh is taxed at 10%, while it is 20% under the old tax regime. However, the new regime has not gained much traction owing to a higher tax burden.
Experts call for more exemptions, government unwilling
Experts say deductions should be allowed for investments in the Public Provident Fund (PPF) and other popular tax-saving schemes. They also say the 30% tax threshold should be raised to Rs. 20L from the current Rs. 15L. These steps would make the new income tax regime attractive for the middle class, they add. However, the government is inclined to make the tax regime exemption-less.