Is the new tax regime beneficial to individual taxpayers in real sense?

• Even though NTR provides for lower tax rates with diversified income slabs, OTR seems to be more popular. Budget 2023 should address the challenges and reform the NTR or introduce a simplified single tax regime.

The Union Budget 2020 introduced the Concessional/New Tax Regime (NTR) under Section 115BAC of the Income Tax Act, 1961, which provides individuals and HUF taxpayers an option to pay income tax at lower rates; Subject to exclusion of certain exemptions and deductions. NTR was introduced to simplify the tax return filing process and reduce the documentation required for claiming exemption/deduction.

Under NTR, salaried individuals should avoid exemptions like house rent allowance, leave travel allowance and deduction for specified investment/expenditure which are otherwise available under the existing/old tax regime (OTR).

Even though NTR provides for lower tax rates with varied income slabs, OTR is more popular, especially among salaried taxpayers. Below are some of the reasons why NTR is comparatively not as attractive as OTR:

- Taxable income above ₹15,00,000 is taxed at 30% under both OTR and NTR

- Contributions to long-term investments and retirement savings plans (such as contributions to provident funds, insurance premiums, etc.) are not eligible for deduction under NTR, unlike OTR. These investments generally give better returns

Deduction for repayment of interest and principal components of housing loan in case of self-occupied property is not available under NTR.

- For salaried taxpayers, the pinch may be higher as the below mentioned exemptions/deductions are not available under NTR:

- Exemption on rental expenditure in lieu of house rent allowance

- Exemption in traveling expenses in lieu of Leave Travel Allowance/Assistance

Standard deduction up to a maximum of ₹50,000

Deduction for tax on employment or profession tax up to a maximum of ₹2,500

- For better understanding, see the example below:



Salaried taxpayers without income from business or profession can opt for NTR every year; However, for salaried taxpayers having income from business or profession, the option is available only once and cannot be changed subsequently.

NTR can be beneficial for taxpayers who do not have much investment or belong to low income groups. It can also be beneficial for those who want a hassle-free tax process without having to worry about keeping track of the exemptions/deductions being claimed. But despite the lower tax rates, the comparative tax outgo under NTR seems high and hence, does not seem very beneficial to the taxpayers.

A fair and tax-efficient single tax regime is the need of the hour in view of the increased expenses for individuals. The upcoming Union Budget 2023 should address these challenges and reform the NTR or introduce a simplified single tax regime.