Budget 2022: Govt reviews new personal tax slabs, incentives likely

In the run up to the upcoming Budget, the union finance ministry has held a review of the new personal income tax regime introduced last year owing to low taxpayer interest in it. The finance ministry is likely to offer some incentives to income tax assessees in the budget to opt for the new tax slab.

Finance minister Nirmala Sitharaman had announced the new tax slab in Budget 2021 with an aim to simplify the direct tax regime for individual taxpayers. The new slabs – with lower taxes – were offered to those taxpayers willing to forego certain deductions and exemptions.

Under the new regime, tax was reduced to 10% on income between ₹5 lakh and ₹7. 5 lakh per annum from 20% in the old tax regime. Tax on earnings between ₹7.5 lakh to ₹10 lakh was cut down to 15% against 20% in the old slab.

Reduced tax of 20% was imposed on income between ₹10 lakh and ₹12.5 lakh and 25% on income between ₹12.5 lakh and ₹15 lakh against 30% on income between ₹10 lakh and ₹15 lakh in the old slab. In the new slab too, the income above ₹50 lakh was to taxed at 30%. The catch, however, was that one will have to forego the exemptions if one opts for the new tax regime.

A finance ministry source said that the government has held a review of the low tax payer interest in the new slabs. “The interest of the tax payers in the new tax regime is tepid. The ministry has reviewed it,” the source said. Another source also said that deliberations have taken place on how to make the slabs more attractive and incentives may be announced in the upcoming budget, without divulging further details. Indications are that the budget may announce some exemptions in the new tax regime.

Experts believe that the new personal income tax slab has not garnered much interest from the taxpayers as it is skewed to the lower income group, and comes as a disincentive to investment into social security.

“Despite the reduced tax rates, only a small portion of assessee have opted for the new framework. The deductions claimed under the old regime such as investment in ELSS, PPF, life insurance, house property loss, etc. are historically viewed as investment avenues for social security purpose. They help generate a decent saving, leading to consequential investment and tax benefits. Therefore, the new regime is generally not opted by individuals,” says Sandeep Bhalla, partner, Dhruva Advisers.

Experts believe that some tweaks in the slab will make it more attractive for the taxpayers. “The government should re-work the tax rates for each slab under the new tax regime – so as to compensate the taxpayers for the potential tax loss on foregoing the deductions available under the old regime. Alternatively, government can consider allowing certain exemptions such as interest on housing loan, investment in social security etc, in the new regime to make it attractive,” Bhalla said.

Gopal Bohra, partner at NA Shah Associates, said, “To attract more people to shift under new tax regime, government should consider increasing the 30% tax rate threshold from ₹15 lakh to ₹25 lakh, so that the difference on account of tax saving under old regime by claiming certain exemptions will reduce and people may think to shift under the new regime.”

Personal income tax seems to be one of the key demand ahead of the budget. In fact in the old tax regime too, experts have called for reduction in the peak rate of 30% as the effective rate goes up to 42% including the surcharges and cess. It is argued that the move is important as there is a need to align the reduced corporate tax rates with the rate of personal income tax.