As the Union Budget 2025 approaches, the country’s vast middle class population is eagerly awaiting announcements related to income tax.
As always, the air is thick with speculation about potential relief measures, including tax breaks for those earning up to Rs 15 lakh and an increased standard deduction under the new income tax regime.
However, much like previous years, experts predict that the government is unlikely to introduce any major changes to the old income tax regime.
This stagnancy has led to rising discussions about whether it’s time to scrap the old regime altogether. Yet, such a move would be risky, given the sizeable number of taxpayers who rely on benefits like home loan interest deductions.
To avoid backlash, another option can be considered: merging the old and new tax regimes.
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WHY WAS NEW TAX REGIME INTRODUCED?
The new tax regime was introduced in the Union Budget 2020 to simplify the taxation process. By offering lower tax rates with fewer deductions, the government aimed to encourage greater participation in tax compliance while streamlining operations for the tax department.
“The government has prioritised the new tax regime to simplify the taxation process and enhance compliance. It was also aimed at letting individuals not having to make forced investments or donations for saving taxes, thereby making more cash available at their disposal,” said an expert
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The preference for the new tax regime is evident, as nearly two-thirds of individual taxpayers have opted for it. According to a recent report, over 67% of taxpayers now choose the new tax regime, underscoring its growing popularity.
Merging the old and new tax regimes could potentially offer the best of both worlds.
Taxpayers would retain the deductions available under the old regime while benefiting from the higher tax slabs of the new regime, leading to significant tax savings for eligible individuals.
However, this comes with its own set of challenges.
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“The cost of compliance under the old tax regime is significantly higher. Merging the two would mean additional compliance burdens for taxpayers, companies, and the tax administration,” said that expert.
He further highlighted that simplification should not come at the expense of key taxpayer benefits.
The old tax regime charges higher tax rates but provides more exemption and deduction benefits, while the new tax regime offers the opposite. Merging the two can simplify the tax structure but could disadvantage those who don’t invest enough to claim deductions under the old regime. The flexibility of two separate regimes allows taxpayers to choose based on their income levels and long-term financial goals.
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While merging the two regimes may seem like a step toward simplification, it could lead to unintended consequences.
Taxpayers who rely heavily on deductions might face a loss of benefits, while the government risks a reduction in tax revenue. Additionally, the increased administrative burden on employers and tax authorities could outweigh the benefits of a unified regime.
“The need of the hour is to raise the tax slabs with fewer unambiguous deductions to ensure ease of compliance for all,” said that expert. He warned that merging the regimes could be counterproductive, as it might reintroduce the complexities the new tax regime sought to eliminate.
As Budget 2025 approaches, the government’s focus is likely to remain on promoting compliance and simplifying tax administration. Whether it opts to merge the old and new regimes or continues to offer them separately, taxpayers can expect the ongoing debate to shape the future of India’s taxation system.
For now, experts advise taxpayers to carefully evaluate their options under both regimes, considering their income levels, deduction claims, and long-term financial objectives.
With clarity expected in the upcoming budget, all eyes will be on the Finance Minister’s announcements regarding income tax reforms.
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