With the Union Budget 2025 just around the corner, Finance Minister Nirmala Sitharaman has a big challenge to meet the growing expectations of various quarters, including taxpayers. From the government’s point of view, the challenge of handling taxpayers’ expectations has become more complex since 2020, when FM Sitharaman decided to introduce the new tax regime and also continue the old tax regime. With two systems in place, around 6.5 crore income tax filers out of the total of around 9 crore have switched to the new tax regime, and about 2.5 crore individuals are still under the old tax regime.
Similarly, with two distinct options available, taxpayers are also facing challenges in terms of dealing with the intricacies of the two tax systems.
CA (Dr.) Suresh Surana, a seasoned expert in taxation, highlights the complexities of the current system and suggests measures to simplify and rationalise individual taxation. Here’s a closer look at the key issues and recommendations for a unified tax system.
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Challenges in the existing dual tax regime: Complexity in tax computation
The current dual tax regime — offering taxpayers a choice between the old tax regime with deductions and exemptions and the new default tax regime with concessional rates but limited deductions — has introduced significant complexity, according to Surana. “Most individual taxpayers, especially salaried individuals, compute their tax liability on their own. Without professional assistance, it becomes difficult for them to assess and choose the most favorable tax regime,” he said.
Rigidity in switching between regimes
While taxpayers can choose between the two regimes each year, those earning income from business or profession face limitations. Surana points out, “A taxpayer deriving income from business or profession who opts out of the new tax regime under Section 115BAC can revert to it only once, making the process less flexible.”
Limited adoption of the new regime
Despite its goal of simplifying taxation and being the default choice since Finance Act 2023, the new tax regime has not gained widespread acceptance. “The restrictions on claiming deductions, such as health insurance premiums and standard deductions for salaried individuals, make the old tax regime more appealing for many taxpayers,” says Surana.
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