Why the new income tax regime has limited appeal?

Asawa claims ₹1.5 lakh under section 80C, ₹2.4 lakh in house rent allowance (HRA), ₹50,000 invested in National Pension Scheme (NPS) (Section 80CCD (1B)) and ₹8,500 for medical insurance premium (Section 80D) as deductions. For an income of ₹18 lakh, he will still pay ₹22,050 less tax under the old regime after claiming the above deductions.

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Like Asawa, for taxpayers with income above ₹15 lakh, the new regime (or concessional tax regime, as it is also known) may not be beneficial even in its improved form. Mint’s calculation shows that taxpayers who have incomes ranging from ₹15.5 lakh to ₹5 crore and claim tax deductions and exemptions upwards of ₹4.25 lakh will pay more tax under the new regime. For incomes from ₹7 lakh to ₹15 lakh, taxpayers will need deductions and exemptions ranging from ₹1 lakh to ₹4.08 lakh to reduce taxable income (see graphic).

Yet, experts say this is not difficult to achieve. “After the tax rebate limit was raised to ₹5 lakh in 2019, many taxpayers with incomes of up to ₹8 lakh opted for aggressive tax saving plans to reduce their taxable income below ₹5 lakh. Of course, this may have pushed some to make investments that they don’t require or don’t necessarily align with their goals, which I don’t recommend either. But, squarely from a tax perspective, individuals can achieve break-even limits if they have a loan or are paying rent, clubbed with 80C and standard deduction,” said Amit Suri, a mutual fund distributor.

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Besides, there are deductions and exemptions, such as children’s tuition fee (under 80C), the interest portion of home and education loans, and HRA, that benefit taxpayers under the old regime. Take the case of Delhi-based Ankur Kaushik, for instance. His income is ₹21 lakh and he claims ₹4.5 lakh in HRA by paying rent to his mother and ₹1 lakh deduction on interest paid towards education loan. “My HRA alone gives me enough incentive to stick to the old regime. If the government removes the clause that you can’t claim HRA by paying rent to your parents, I may think of moving to the new regime,” said Kaushik.

New regime: Who benefits?

Taxpayers with incomes of up to ₹7 lakh can move to the new regime straight away as the threshold for tax rebate under Section 87A has been increased from ₹5 lakh to ₹7 lakh. Under the old regime, taxpayers with income of ₹7 lakh have to claim deductions of ₹2 lakh to bring down their net taxable income below the ₹5 lakh no-tax threshold. Delhi-based Lakshaya Bakshi is excited “My income is ₹7.3 lakh. I can switch to the new tax regime next year and I won’t have to pay tax,” said the 29-year-old. Being a salaried individual, Bakshi will benefit from the ₹50,000 standard deduction introduced in the concessional regime.

But, will he stop tax-saving investments that he currently makes? “I can’t control employee provident fund (EPF) contributions as they are mandatory but I will stop my investments in equity linked savings schemes (ELSS). I invest in stocks directly, so I can use the freed-up capital for that,” said 29-year-old Bakshi.

Experts say taxpayers moving to the new regime can have better control over their investments. “Tax planning should be incidental to overall financial planning but taxpayers don’t look at that. For instance, in trying to exhaust all the available deductions and exemptions, people often use up their entire disposable income and don’t create an emergency fund, which can now be prioritized,” said Rohit Shah, a registered investment advisor (RIA) and founder of Getting You Rich.

Prableen Bajpai, founder, FinFix Research, said investors who can save just ₹1.5 -2 lakh a year, can now invest as per their requirements instead of buying tax-saving instruments. However, she is quick to add that this has a flip side: The onus to save will be on the taxpayer now. “I strongly believe long-term investing has to be incentivized, especially for young earners, and 80C was a good starting point to inculcate the savings habit,” Bajpai said.

Asawa is a case in point. “Planning for 80C drove me to invest for the long term. Had the money been liquid, I would have spent it,” he said. “Despite my saving habit, I will liquidate investments if the need arises. For that reason, longer lock-ins with EPF, NPS and ELSS work for my retirement goal.”

In Mumbai, 37-year-old Ishita Visaria shares the same views. “Enforced saving takes away the temptation of spending and has worked very well for me. My investments in PPF (Public Provident Fund) and ELSS funds have grown substantially so far. If it were left up to me, I would not have saved the same way,” said Visaria, a chartered accountant.

The same can be said about medical insurance and pure life insurance as well, both of which carry tax incentives under the old regime. “The question to ask is how many people will buy insurance early in their lives if tax sops does not force them to,” said Suri.

To be fair, gross mis-selling also happens in the name of tax saving. “Gradually as the new regime takes over, the menace of insurance mis-selling will be curbed,” said Bajpai. She added that the new regime makes perfect sense for senior citizens with income up to ₹7 lakh not just because they don’t have to bother about tax planning but also because it will considerably improve their cash flows. “For senior citizens, it’s not easy to park funds in tax-saving instruments just to be able to save ₹10,000- ₹15,000 in tax at the end of the year.”

Satya Sontanam contributed to this story.