Old Tax Regime and New Tax Regime
Submitted to:
DR. Batani Raghavendra Rao
Raj Nandini Singh
Sanjay H V
Rohan M
Pratham Sachin Hallikeri
Sadhana A
Rahul Agrawal
Abstract
The personal income taxation system of a country is also important in determining the behavior of a taxpayer, the savings and investment trends and the efficient mobilization of revenue. The existence of the personal income tax structure in India has been characterized by the old tax regime that focuses on application of exemptions and deductions to encourage saving and investments and other socially desirable spending like housing, insurance, and medical care. Despite the fact that such a regime has assisted in the long-run financial planning, it has also become too complex and burdensome in terms of compliance and has brought issues of transparency, efficient administration, and ease to the taxpayers.
In order to manage such challenges, the New Tax Regime was proposed by the Government of India in the Union Budget 2020 as the optional alternative to the current one. The New Regime has a simpler tax system with lower slab rates and few exemptions and deductions that are allowed under the Old Regime. This reform is a major turn in the personal income tax policy of India, which is more of incentive based policy to rate based and simplicity based policy.
The research paper is a detailed comparative discussion of the Old and New Tax Regimes in India with an aim of determining the effectiveness, suitability, and effects of the two to individual taxpayers. The paper explores the structural characteristics of the two regimes, contrasts the applicability of tax slabs and effective tax liabilities and what this implies to the taxpayers in diverse income brackets. In addition, the paper also examines the effect of eliminating or maintaining deductions on the individual financial behavior based on savings, investment decision making, and tax planning strategies.
The research study is premised on secondary data that was gathered on government publications, income tax laws and budget documents, as well as on the available academic literature. By contrasting the two tax regimes and critically examining them, the paper establishes the strengths and weaknesses of both regimes and points to the circumstances in which one of the regimes can be more favorable than the other. The study results will be useful in helping taxpayers make informed choices in terms of regime choice and the tax simplification policy and the policy debate at large.
