New Tax Regime has slowly but surely gained taxpayers’ acceptance. Is this change here to stay?

Taxpayers claim the primary attraction of the new regime lies in its straightforward approach. They are no longer required to calculate and claim multiple exemptions and deductions, such as Leave Travel Allowance (LTA), House Rent Allowance (HRA), and Section 80C benefits. By eliminating these complexities, the NTR simplifies the tax-filing process.

"This shift suggests that taxpayers find the New Tax Regime more appealing, likely due to its simplified structure with lower tax rates and fewer deductions," says Parizad Sirwalla, Partner and National Head-Tax, Global Mobility Services at consultant firm KPMG in India.

The NTR is particularly beneficial for those with simpler income structures who lack significant investments in tax-saving instruments. High-income earners also prefer the new regime. For those with an income of Rs 5 crore and above, the surcharge of 37% is reduced to 25%. “Foreigners/expatriates working in India generally do not have many deductions, and hence, prefer the new regime,” adds Sirwalla.

Another big reason for the jump in taxpayers opting for the NTR has been the decision to make it the default choice. “Earlier, the old tax regime was the default tax regime. But recently, the finance minister made the new tax regime the default one. So, if you don’t exercise the choice of selecting a tax regime, it would be the new tax regime by default. This has given a big impetus to wide adherence to the new tax regime,” says Sujit Bangar, Founder of tax filing platform TaxBuddy.com.

Further, if one’s income is up to Rs 7 lakh, there is no tax under the new regime. It also increases disposable cash, while offering lower tax rates. “This is another reason for the recent popularity of the new tax regime,” adds Bangar.

Old vs New

Under the new regime, taxpayers cannot claim deductions for common sections like 80C, 80D, LTA, HRA, or home loan interest. “Unlike the old tax regime, where taxpayers could claim various exemptions, deductions, and rebates to reduce their taxable income, the new tax regime is more streamlined and does not allow most of these exemptions,” Panjiar emphasises. While simplicity is a significant advantage, it may not be ideal for those who rely on deductions to reduce their tax liability.

For example, if you have a gross income of Rs 15.5 lakh and more, deductions of more than Rs 3.75 lakh (excluding standard deduction), the old tax regime will suit you. However, if the deduction is Rs 3.75 lakh, the tax liability will be the same under both regimes. This is because Rs 3.75 lakh is the break-even deduction for a gross income of up to Rs 5 crore. For income beyond Rs 5 crore, the new tax regime is more beneficial due to the reduced surcharge of 25%. The surcharge under the old tax regime is 37% for the same category. The dual option allows taxpayers to choose the tax regime that suits them the best.

Additionally, eligible taxpayers have the flexibility to choose between the old and new regimes every year. “This allows individuals to select the regime that best suits their financial situation and provides the most favourable tax outcomes,” says Panjiar.

On the flip side, taxpayers with large financial commitments might find the lack of exemptions in the new regime discouraging. However, with rising disposable incomes, taxpayers have the flexibility to prioritise financial goals over tax-saving instruments. Traditional vehicles like PPF and ELSS may witness reduced participation, but the core objectives remain essential. “While there may be a shift away from traditional tax-saving instruments, the core objectives-like retirement planning, saving for children’s education, purchasing property—remain priorities on a case-to-case basis,” says Sirwalla.

Under the NTR, one can claim a deduction for NPS under Section 80CCD (2) only for the employer’s contribution. The deduction for employer’s contributions to the NPS has been increased, providing further incentives. “Employees having employer contribution to NPS from FY25 will tend to benefit more from the new regime as the deduction for such contribution has been enhanced to 14% as compared to 10% in the old tax regime,” says Sirwalla.  

Budget 2025-26

The new regime, introduced in 2020, found few takers initially. It was in Budget 2023 that it underwent substantial reforms to enhance its appeal. Apart from increasing the standard deduction to Rs 75,000, a tax exemption was introduced for those earning more than Rs 7 lakh annually. The number of slabs was reduced to five from six. Additionally, there was an increase in the basic exemption limit from Rs 2.5 lakh to Rs 3 lakh.

Given the government’s focus on simplifying taxation and encouraging migration to the NTR, further reforms are anticipated. Poorva Prakash, Partner at management consulting firm Deloitte India, suggests increasing the basic exemption limit and reducing the number of tax slabs further to make the system more competitive with countries like Hong Kong and Singapore.

Further enhancements to the standard deduction could compensate for the loss of benefits like HRA and property deductions. “To further encourage people to move from the old tax regime, the government may consider a further increase in the standard deduction. This could help compensate employees for the loss of benefits they were eligible for under the old regime, such as HRA exemption and loss for self-occupied property,” says Prakash.

The NTR represents a significant shift in India’s taxation landscape. While its appeal continues to grow, further reforms aimed at aligning taxpayer expectations with economic goals could solidify its position as the preferred choice. By introducing further incentives, the government has the potential to transform the new tax regime into a universally accepted model of taxation, ensuring a smoother transition for all taxpayers while maintaining fiscal stability. With media reports suggesting a potential revamp and further simplification of the Income Tax Act, 1961, all eyes are now on Budget 2025! 

@teena_kaushal