Question

Can we really compare tax rates since the individuals rate can vary based on income level?

Answer 1

The Union Budget 2020 introduced a new personal income tax regime for individual taxpayers. However, the option for this concessional tax regime came with a cost, it required the taxpayer to forego certain specified deductions. These include standard deduction of Rs 50,000, deduction under section 80C of Rs 1.50 lakh and interest on self-occupied property of Rs 2 lakh, deductions which are availed by most taxpayers. As a result, the concessional tax regime may not always be beneficial.
Based on the illustrative table below, you can clearly see that the maximum benefit that can be availed under the new tax regime (considering no investments are made) is Rs 75,000 in terms of tax savings. As a result, unlike the corporate tax concessional tax rate regime which reduces tax rates across income levels, the concessional tax rate has limited application and will benefit persons in the lower income brackets. The highest personal income tax rate of 42.7 per cent will continue to be a huge challenge for high net worth individuals (HNIs).
In the existing tax regime the basic exemption income slab in case of a resident individual who is 60 years or more (senior citizen) and resident individual of the age of 80 years or more (very senior citizens) at any time during the previous year, continues to remain the same as before at Rs 3 lakh and Rs 5 lakh, respectively. The above table presents the comparative working for individual taxpayers, other than senior citizens and super senior citizens, wherein Rs 2.5 lakh is the basic exemption limit in both the tax regimes.

The pros of the new regime are as follows:

Reduced tax rates and compliance: The new regime provides for concessional tax rates vis-à-vis tax rates in the existing or old regime. Further, as most of the exemptions and deductions are not available, the documentation required is lesser and tax filing is simpler.
Investor may not prefer to lock-in funds in the prescribed instruments for the specified period: Under the new regime, all taxpayers would be treated at par and benefit of deduction/allowances would not be a criteria for availing the tax exemption. This may be helpful for those categories of taxpayers who may not subscribe to the specified modes of investments, as most of the investments have a lock-in period, before which it cannot be withdrawn. They can invest in open-ended mutual funds/instruments/deposits, which provides them good returns as well as flexibility of withdrawal as well. For instance, certain eligible instruments have a longer lock-in period such as fixed deposits with banks and post offices have a lock-in period of five years, equity-linked savings schemes (ELSS) is for a period of three years, National Savings Certificates (NSC) for five years, etc.
Increased liquidity in the hands of the taxpayer: The reduced tax rate would provide more disposable income to the taxpayer, who could not invest in specified instruments due to certain financial or other personal reasons.
Flexibility of customising the investment choice: The existing tax regime provides for deductions to the taxpayer, provided he makes investments in certain instruments and manner as prescribed in the Act. This restricts the investment choices for the taxpayer as he has to make the investments only in the instruments specified. However, the new regime provides taxpayer with a flexibility of customising their investment choices.