In economics, the term “Tax regime” is used to express a system of taxes implemented in terms of “tax slabs and tax rates” in both direct and indirect taxes. In 2020, income tax regime in India saw major changes in terms of slabs, rates, and exemptions. Let’s understand in detail.
In 2020, The Government of India decided to go for New income tax regime with decisive changes in tax rates and slabs. Though government introduced new income tax regime, it is optional in nature and depends on the choice of taxpayers whether to shift new regime or remain in the old.
Difference between regime and tax regime
The term “Regime” has multiple meanings and connotations. Politically, it is a type of mode or means of rule by virtue of a given nation is governed by the governing agency.
In terms of tax system in economics, “Regime” is a system, structure, or order of tax rates and slabs of direct and indirect taxes for taxpayers in country. Basically, there are three forms of taxes: progressive, regressive, and proportional taxes.
Logically speaking, no tax regime could be permanent but subject to change with changing economic conditions in time and space. Likewise, government in charge brings necessary and desired changes from time to time to make it more responsive and taxpayer friendly.
Understanding tax regime in India
Basically, right from the beginning, India adopted and perpetuated ” Progressive tax regime” to ensure economic equality and balanced growth. Progressive tax regime implies higher income earners are taxed more than low income earners. As per economic scholars, it is compulsory to avoid “K” form of growth pattern.
New income tax regime in India
In Union Budget 2020, Nirmala Sitharaman introduced a “simplified, responsive, and taxpayer friendly”, optional income tax regime with three new tax slabs. However, taxpayers can continue with the existing structure if that suits them more – economic times 8 July 2021.
What is New in New tax regime?
Precisely speaking, more tax slabs and rates more suitable for different income earners. Simply, it is a genuine attempt as per by finance minister to make this regime more responsive and taxpayer friendly comparatively.
| Slabs of income (lakhs) | old tax regime (%) | New tax regime (%) |
| Upto 2.5 | nil | nil |
| 2.5 to 5 | 5 | 5 |
| 5 to 7.5 | 20 | 10 |
| 7.5 to 10 | 20 | 15 |
| 10 to 12.5 | 30 | 20 |
| 12.5 to 15 | — | 25 |
| above 15 | — | 30 |
Courtesy by hdfcbank.com
However, there is hanging sword over the exemptions earlier taxpayers used to avail. Here, government intent is clear to increase base of taxpayers and the taxable income in New tax regime in India.
Exemptions in New tax regime compare to old
Reduction in exemptions and incentives is the notable feature of New tax regime compare to old.
With old tax regime, the taxpayer can continue to avail existing deduction such as section 80C and section 80D of the income tax act 1961 and tax exemptions like house rent allowance, LTC cash voucher scheme, etc. — economic times
In the New tax regime, these exemptions are no more to avail but there are certain incentives that taxpayers can avail in terms of investment. They are like, interest received on Post office savings, amount received from LIC, income from agriculture, etc.
But, in coming days, there is no guarantee of these to be continued.
Present state of new tax regime
Still today, taxpayers are exploiting optional option to fill income tax return blaming New tax regime is in favour of corporates and super rich class — India Today.
As I mentioned earlier that in the old tax regime, there were lot of exemptions and incentives for various purposes that make better bet for lower income earners.
Government incentives in favour of new regime
So far, corporates and higher income earners have positive response regarding new tax regime, but poor feedback received from individual taxpayers. Understanding the fact that individual taxpayers are more reluctant to shift to new tax regime, in the coming days, government might offer something to convince them to opt for newer from earlier.
However and nevertheless conjunctions