Allow deductions, hike threshold for levying peak 30% tax to make optional tax regime attractive: Experts

The new tax scheme has not gained traction as in several cases it resulted in a higher tax burden.

“Investments in Public Provident Fund (PPF) and other tax savings schemes should be allowed as deductions and the threshold for 30% tax should be raised to ₹20 lakh under the concessional income tax regime in Budget 2023-24 to make it attractive for middle-income taxpayers,” experts said.

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

A 5% tax is levied on total income between ₹2.5 lakh and ₹5 lakh, 10% on ₹5 lakh to ₹7.5 lakh, 15% on ₹7.5 lakh to ₹10 lakh, 20% on ₹10 lakh to ₹12.5 lakh, 25% on ₹12.5 lakh to ₹15 lakh and 30% on above ₹15 lakh. The scheme, however, has not gained traction as in several cases it resulted in a higher tax burden.

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Experts believe that Finance Minister Nirmala Sitharaman should look at including certain popular tax deductions claimed by individuals, in addition to increasing the basic exemption limit and hiking the threshold for peak tax rate, in the optional tax regime to make it attractive for taxpayers.

Nangia Andersen India Chairman Rakesh Nangia said the government should rationalise the tax rates further in the optional tax regime to make it commensurate with the deductions/exemptions that the taxpayer is foregoing.

"The biggest drawback of the optional tax regime is that, for the lower and middle-class taxpayers, tax rates provided under the optional tax regime struggle to compete with the normal tax regime, if the available deductions and exemptions are pressed into service. Investments and social security linked deductions should be made available even in case of the optional tax regime," Nangia said.