Sitharaman defends new tax mechanism: ‘Gains from old regime’s simplicity remain’

The minister was responding to an assertion made in the book Reform Nation, authored by Observer Research Foundation Vice President Gautam Chikermane, which states that the new and voluntary income tax regime had removed the simplicity of the old one, which had just three tax slabs of 10 per cent, 20 per cent, and 30 per cent.

Sitharaman, while speaking at the book’s launch, said the old income tax regime is not at all simple as it is “full of exemptions”.

“For every tax assessee, it has 7, 8, 9, 10 exemptions. And with all that exemptions, the rate 10, 20, 30 per cent continues. It continues even today. We have not removed it. What we have done in the name of simplicity and to avoid harassment… removing harassment was what was aimed at when we brought in faceless tax assessment,” she said.

“In order to keep the simplicity and not deny those who want to keep the old simplicity, we kept that intact but we have come up with a parallel system which has no exemptions whatsoever, but which has simpler, more favourable rates… The reason why I had to bring in seven slabs was to make simpler and lower rates for those who are in the lower incomes,” she said.

In the 2020-21 budget, the government brought in an optional income tax regime under which individuals and Hindu Undivided Families were to be taxed at lower rates if they did not avail specified exemptions and deductions, such as house rent allowance, interest on home loan and investments under Section 80C. Under this, total income up to Rs 2.5 lakh will be tax exempt.

A 5 per cent tax is levied on total income between Rs 2.5 lakh and Rs 5 lakh, 10 per cent on Rs 5 lakh to Rs 7.5 lakh, 15 per cent on Rs 7.5 lakh to Rs 10 lakh, 20 per cent on Rs 10 lakh to Rs 12.5 lakh, 25 per cent on Rs 12.5 lakh to Rs 15 lakh, and 30 per cent on above Rs 15 lakh. Under the old system, income up to Rs 2.5 lakh is exempt from personal income tax. Income between Rs 2.5 lakh and Rs 5 lakh attracts 5 per cent tax, while 20 per cent tax is levied for income between Rs 5 lakh and Rs 10 lakh. Income above Rs 10 lakh is taxed at 30 per cent.