It was in the financial year 1997-98 that the government first brought in income tax slabs of 10 per cent, 20 per cent and 30 per cent in what was dubbed the “dream budget” presented by the then Union Minister of Finance P. Chidamabaram. At that time, the highest tax slab applied to incomes above Rs 1.5 lakh, while income up to Rs 40,000 had no tax liability. There was a big tax incentive for investors in Provident Fund too.
Twenty-five years later, in Budget FY2023-24 announced by incumbent finance minister Nirmala Sitharaman, the highest tax slab remains at 30 per cent, but applies to income above Rs 10 lakh under the old tax regime and Rs 15 lakh under the new tax regime.
At the same time, there is no tax for income up to Rs 7 lakh under the new tax regime, taking standard deduction into consideration. The new tax regime has lower tax slabs compared to the old tax regime, but it doesn’t allow investors to claim most of the deductions available, including those under Section 80C of the Income-tax Act, 1961, and others.
Indian investors have wholeheartedly embraced Section 80C in the last 15 years, so much so that a lot of families’ savings and investments are made keeping those benefits in mind. It was reintroduced in 2006 (it was first introduced in 1967, but was replaced with Section 88 in 1991) with a maximum investment limit of Rs 1 lakh, which was later increased to Rs 1.5 lakh in 2010. Since then, despite widespread demands, the limit has not been increased, even as inflation has drained the incomes of households.
In the first two years after the new tax regime was introduced, there were few takers for it as it did not offer the flexibility to save tax for most income groups. However, in the current financial year, it has become more competitive for several income groups and can also benefit the younger generation as well as the senior citizens (read Outlook Money’s analysis and guide here:
bit.ly/3P9IgCd and bit.ly/3E7Cr1I).
Over the years, successive governments have endeavoured to simplify the tax filing process, but it’s still not clear if it has eased the lives of taxpayers. A new set of tax filing forms are introduced every year, with new requirements, leaving scope for mistakes. The system, however, is fully digitised, which has considerably reduced the paperwork burden and has also improved transparency. In a way, this has encouraged citizens to be more responsible and honest in declaring the right amount of tax on their income. One of the biggest achievements has been the quick refund process in most cases.
The Way Forward
The government’s push for the new tax regime is apparent and it will likely encourage more Indians to be responsible about their goal-based investments. It also pushes them, perhaps unwittingly, to get rid of the short-term view of saving tax for the year and focus more on long-term financial goals.
However, there is scope for further simplification to ease the process and remove laws that are open to interpretation. Another leap that the government needs to take is in simplifying and quickening the process of appeals, among many other issues.
The tax piece in one’s life is difficult to fix for most. Archit Gupta, CEO, Clear, and Sudhakar Sethuraman, Partner, Deloitte Touche Tomatsu India LLP, give some handy suggestions.
How Do I Choose Between The New And Old Tax Regimes?
The new tax regime is different from the old one in two ways. First, it has more tax slabs with lower tax rates. Second, all the major exemptions and deductions available to taxpayers in the existing (old) tax regime are not allowed in the new tax regime.
Hence, where the advantages of lower rates in the new tax regime outruns the benefit of the exemptions and deductions available under the old tax regime, the taxpayer can choose the new tax regime.
To know which tax regime is better, the taxpayer should calculate the income tax liability between the two regimes. There is no fixed category of taxpayers for whom it can be clearly specified which tax regime is better. It will vary depending on the deduction or exemption the taxpayer can claim in the particular year.
For the old regime, calculate tax at the old tax slab rates after availing all the eligible exemptions and deductions from the income. For instance, salaried individuals can claim exemption for leave travel allowance (LTA), housing rent allowance (HRA) and standard deduction of Rs 50,000. Also, individuals are allowed to claim deduction under Section 80C up to Rs 1.5 lakh and additional deduction of Rs 50,000 under Section CCD (1B) for contribution to the National Pension System (NPS), as well as those under Section 80D, and deduction for interest paid on home loans, etc. For the new regime, take the lower tax slabs and calculate accordingly.
We have observed that most taxpayers benefit from being in the old regime when they maximise Section 80C and go for tax deductions and benefits available in their salary structure, such as claiming HRA, receiving a part of the CTC as reimbursements, etc. The taxpayers who do not prefer to invest in tax-saving instruments and are not eligible for any exemptions from income may choose the reduced slab rates of the new tax regime.
Individuals with income under the head ‘salary’, ‘house property’, ‘capital gains’ and ‘other sources’ can switch between the old or new tax regimes every year, but individuals who have income from business or profession get only one chance to return to the old regime after they opt for the new tax regime.
Which Products Help Save Tax In Old Regime?
Archit Gupta | CEO, Clear
To start with, optimise your salary from your employer so that you are able to make the most of the exemptions and deductions available to you.
One of the best ways to reduce your taxable income is by making full use of the deduction limit available under Section 80C. There are a lot of investment options that you can choose from. These include, equity-linked savings scheme (ELSS), Public Provident Fund (PPF), and five-year fixed deposits, among others. You could start by investing small amounts through a systematic investment plan (SIP) in ELSS or multiple small deposits in PPF.
Many taxpayers also claim deductions on 80D for health insurance and 80TTA on interest earned from savings accounts.
Another thing to be mindful of is to claim the tax benefits being offered by your employer. If your employer allows reimbursements etc., those can reduce your overall taxable income. If you are living on rent, you can claim HRA (under the old tax regime). Likewise, you can also invest in NPS and claim benefit from tax deductions under Section 80CCD(1B) towards self-contribution and under Section 80CCD(2) for contributions made by employers. Incidentally, deduction on employer contribution is available under both the old and new tax regimes.
What’s The Role That Taxation Plays In Investments And How?
Taxation offers an important perspective for an investor to look at investments, however it is not the only one. There are other factors, such as the risk-taking ability of the investor, overall financial goals, lock-in period of the investment, time horizon available to invest, and allocation of portfolio that should be considered.
Sometimes, taxpayers make the mistake of choosing investment products purely on the basis of the tax benefits they offer. However, they often end up with products that either don’t align with their goals or offer subpar returns. A classic example of this would be insurance policies. Investors often do not understand the returns offered by insurance policies, but they still get trapped in them just because they offer tax benefits.
An investor with a very long-term horizon may be better off with investing in equity as compared to products that offer a fixed rate of return in the short run, and which may be exempt from tax, as the returns from equity will be higher in the long term. As an investor, it is important to considers all the factors listed above (and not just taxes) before choosing an investment product.
Those opting for the new regime may not need to worry about tax-saving investments at all.
What Are The Key Factors To Ensure Hygiene In My Tax Life?
Sudhakar Sethuraman, Partner, Deloitte Touche Tohmatsu India LLP
In recent years, the government has taken many proactive measures to ensure that income tax return (ITR) processing and refunds are generated on a real-time basis. The government has also ensured that taxpayers report income, deductions and/or exemptions and taxes correctly on their ITRs.
So, here are some of the key factors taxpayers should follow to ensure tax hygiene in their life. Here they are:
- Link PAN with Aadhaar, if not already completed.
- File ITR appropriately to avoid non-compliance. While filing the tax return, thoroughly review the data captured by the tax authorities in Form 26AS, Annual Information System (AIS), etc.
- Keep the income tax account up to date with respect to address, mobile number, etc.
- Ensure that outstanding queries or demands, if any, are addressed on time to remain compliant.
- Pay up quarterly advance tax, where applicable, to avoid payment of interest.
- Ensure proper tax compliance at the time of purchasing an immovable property or making rental payments towards a let-out (rented) property.
Also, since the new tax regime is now the default one, some additional factors should be kept in mind. These are:
- Make a decision on whether taxpayers want to be covered under the new regime or the old one. Taxpayers can also use the tax calculator provided by the income tax department to work out the cost-benefit analysis.
- If you are a salaried taxpayer, you can choose between the old and the new regimes by informing your employer in advance or while filing ITR under Section 139(1).
- File original ITR under Section 139(1) mandatorily if you want to opt for the old tax regime. Othersise, you will be taxed under the default new tax regime.
- If you have income from business or profession, you need to file Form No. 10-IEA before filing your ITR under Section 139(1).
If you are opting for the old tax regime, here is an indicative list of exemptions/deductions provided:
- If you are a salarid taxpayer residing in a rented accommodation, you can continue to claim HRA deduction, which at present is not capped, and is derived on the basis of the basic salary, house rent received, rent paid, and the city of employment.
- Salaried taxpayers can also claim exemption/deduction with respect to leave travel allowance, food or meal coupons, children’s education or hostel allowance, etc., provided these components form part of their salary structure.
- Investment in Provident Fund, NPS, life insurance, fixed deposits, National Savings Certificate, etc. continues to be allowed.
- Expenditure incurred on medical insurance, preventive health checkups, housing loans, education loans, donations, etc. will help taxpayers maximise tax savings under the old regime.
How To Deal With Tax Paperwork, Updates?
In the electronic era, dealing with paperwork has been hassle-free as all the data is now flowing seamlessly to the taxpayers digitally. Now, AIS helps taxpayers to validate most of their income which is reported by various entities and published by the government. This makes it easier for taxpayers to validate and report it in their ITR. However, it is also important that taxpayers report any variation correctly and in a timely manner.
In addition, it is important that taxpayers retain supporting paperwork for a period of up to 10 years (16 years in cases involving foreign assets and income). So, taxpayers have to spend some time in keeping their books in order to experience a hassle-free tax compliance.
Aabha S. Mathur with husband Sumit, son Samarth and daughter Akaisha in 2023 (above) and 2011. Photo: Bhupinder Singh, Tribhuvan Tiwari
Then And Now
Aabha S. Mathur
Delhi-based Aabha S. Mathur, now 46, was featured in Outlook Money’s regular financial planning section called ‘My Plan’ in 2011. Over the years, she has learned the importance of not putting all her resources in one place and has accordingly spread them across gold, shares, property and mutual funds. While her son has just finished his Class XII and plans to pursue engineering in the US, her daughter is busy preparing for her Class X Boards.
She has prioritised building a corpus for her children’s education overseas, recognising the potential costs associated with international education. Her love for travelling has led her to budget and save for those experiences, reflecting her balanced approach to enjoying life while being financially responsible.
She says the Covid-19 pandemic taught her the value of having a liquid emergency fund that can provide financial security during uncertain times. She says she is always willing to learn from challenges and has a long-term vision. She is now focussed on her retirement planning.