Aimed at spurring consumption demand and offering some relief to taxpayers, especially from the middle class, Finance Minister Nirmala Sitharaman proposed a new personal income tax regime with reduced rates for those earning upto ₹15 lakh.
The tax rate for those earning between ₹5 lakh to ₹7. 5 lakh has been lowered from 20% to 10%, and for incomes between ₹7.5 lakh to ₹10 lakh to 15% from 20%. Similarly, tax rates have been lowered from 30% to 20% for those earning between ₹10 lakh to ₹12.5 lakh, and to 25% for those with incomes from ₹12.5 lakh to ₹15 lakh.
Tax payers can, however, opt for the new rates, if they give up almost all tax exemptions and deductions they enjoy under the current regime, akin to the conditional tax rate cuts announced for corporates last September.
Revenue Secretary Ajay Bhushan Pandey said even those opting for the lower rates will retain tax benefits on payouts at the time of retirement like gratuity, employees’ PF and NPS accumulations; employers’ contributions to EPFO, the National Pension System or superannuation payments (upto ₹7.5 lakh), amounts received on VRS (upto ₹5 lakh).
But most exemptions used by salaried employees on account of leave travel allowance, house rent allowance, housing loan repayments, savings instruments like PPF and LIC, as well as the standard deduction will cease to be available.
The Finance Minister said this could result in savings of ₹78,000 for someone earning ₹15 lakh and not availing any incentives in the existing regime.
Tax practitioners noted the new rates regime would only be attractive for non-salaried taxpayers or those who don’t avail any exemptions as of now. For many taxpayers who avail benefits, the difference in tax outgo may not be substantial.
Income (per annum) | Proposed Tax Rate | Old Tax Rate |
|---|---|---|
Upto ₹2.5 lakh | No tax | No tax |
₹2.5 lakh-₹5 lakh | No tax | 5% |
₹5 lakh to ₹7.5 lakh | 10% | 20% |
₹7.5 lakh to ₹10 lakh | 15% | 20% |
₹10 lakh to ₹12.5 lakh | 20% | 30% |
₹12.5 lakh to ₹15 lakh | 25% | 30% |
Above ₹15 lakh | 30% | 30% |
“It is almost impossible for a taxpayer to comply with the Income-Tax law without taking help from professionals,” the Minister said. However, most individuals may still need accountants’ help to determine if moving to the lower tax rates would benefit them.
The Finance Bill has also proposed three major changes to prevent tax abuse by citizens that don’t pay taxes anywhere in the world. The changes are a reduction in the number of days that an Indian citizen can be granted non-resident status for tax purposes from 182 to 120; citizens who don’t pay taxes anywhere will be deemed to be a resident of India, and the definition of ‘not ordinary resident’ has been tightened.
“Now in order to become a non-resident, one has to stay out of the country 240 days,” said Mr. Pandey. “In many cases, we have found that some people are resident of no country in the world but stay a certain number of days in different parts of the world. If any Indian citizen is not a resident of any country, then he will be deemed to be resident in India and then his worldwide income will be taxed,” he added.
It’s still not clear if this will apply to many Indian expats working in the UAE and other countries. “We will have to wait and see if this will apply to those working in the UAE as technically, they tax people but the tax rate is zero,” said Amarpal Chadha, tax partner & India mobility leader, EY.
