Modi Govt to Scrap Old Tax Regime? What Taxpayers Need to Know After Income Tax Slab Changes

The government has been promoting the new tax regime ever since it was first proposed in the Union Budget 2020–21. In the latest Budget speech for 2024-25 by Nirmala Sitharaman, the Union Finance Minister introduced a slew of changes in the income tax slabs for the new tax regime to make it more attractive to taxpayers. Additionally, standard deduction limit has been hiked to Rs 75,000 from Rs 50,000 in new tax regime. The changes in the tax slabs is expected to save up to Rs 17,500 for taxpayers.

The finance minister recently emphasized for a comprehensive review of the Income Tax Act which led to many think that the Prime Minister Narendra Modi-led government at the Centre may announce a sunset provision for the old tax regime after which it will cease to be effective.

During a press conference after the budget presentation, FM Sitharaman, however, stated that there was no decision yet on when the old tax regime would be phased out, and added that she could not confirm if there would be an end to the old system.

"Our intention is that there should be a simpler taxation regime. And if we are going towards a simpler tax regime, through this review, our aim will be to make it simple. This new tax regime has come on the path of simplifying the old tax regime," the Finance Minister said.

"Whether there will be a sunset or not, I can't say right now. We will take a decision only after reviewing it," she added.

Pallavi Dinodia, Co-Chair, Direct Tax Committee, PHD Chamber of Commerce and Industry believes the new regime, characterized by lower tax rates and fewer exemptions, is designed to offer clarity and predictability, encouraging voluntary compliance.

The government's move to scrap the old tax regime marks a significant shift towards a simplified and taxpayer-friendly system. The previous regime was often criticized for its complexity, with numerous exemptions and deductions creating confusion and compliance challenges.

By phasing out these exemptions, the government aims to streamline the tax filing process, reduce administrative burdens, and increase transparency. This transition represents a step towards a more efficient tax system, aligning with global best practices and supporting India's economic growth objectives, Pallavi Dinodia further noted.

Harsh Bhuta, Partner, Bhuta Shah & Co. said Budget 2020 introduced a new section 115BAC, which allowed an individual or HUF to opt for the new personal regime of taxation. The objective was to cut down on all the vast deductions available to the taxpayer, which makes it quite complex for a small taxpayer to file his return, while at the same time providing higher tax slabs, making the net tax outflow similar or, in some cases, more favorable. Further, Budget 2023 made the new personal tax regime as the default tax regime. Budget 2024 brought about favourable changes in only the new regime tax slabs and increased the standard deduction limits for new scheme.

Harsh Bhuta pointed out, "it is very clear that the government is slowly but surely prompting taxpayers to move to the new personal tax regime, which is already being opted for by 2/3rd of total tax payers. It’s likely the old scheme may be scrapped in the future. A direct corollary can be made with the new corporate tax regime where tax was reduced from 30% to 22% and is now the dominant scheme being opted for by 58% of companies."

The new tax income tax slabs in the new tax regime will be effective from April 1,2024 once the budget is passed by Parliament and receives Presidential assent.

As per the announcement, a 5 per cent tax will be levied on income between Rs 3-7 lakh, 10 per cent between Rs 7-10 lakh, 15 per cent for Rs 10-12 lakh. However, 20 per cent tax will continue to be levied on income between Rs 12-15 lakh and 30 per cent for income above Rs 15 lakh.