The new alternative tax regime in the Finance Act, 2020 introduced by the Centre last year has few takers and taxpayers are mostly using the old personal income tax regime. Only a few taxpayers have are opting for the new alternative tax regime, Mint reported quoting professionals assisting taxpayers in filing returns.

From fiscal 2020-21, taxpayers have the option to choose from two tax regimes – the existing or old tax regime, which offers deductions and tax rebates, and the new optional tax regime, which offers concessional rates but no deductions and tax exemptions.

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While the old tax regime has only three tax slabs and higher tax rates, the new one has six slabs and lower rates. The government had introduced the new regime with the hope that the tax slab shifts would be more gradual than abrupt.

According to Clear, an online tax service provider formerly known as Cleartax, only 10 percent of the taxpayers who filed returns through the portal have opted for the new regime.

Even though the new tax regime has a simplified mechanism and reduces the tax burden, taxpayers are opting for the old regime and going for tax deductions, Mint quoted Srivatsan Chari, co-founder of Clear.in, as saying. "Union budget for FY22-23 could be an opportunity to relook at the new tax regime," Chari added.

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According to experts, retirement savings instruments with tax benefits are popular among taxpayers, which made the old regime more attractive. As these savings instruments are important for social security, most taxpayers have already planned for it, Ved Jain, former president of the Institute of Chartered Accountants of India (ICAI), told Mint.

At the same time, the new tax regime does not provide deductions for social security savings, which makes the regime less popular. It may also be difficult for taxpayers to discontinue a scheme such as a life insurance policy once they have signed up for it as it may involve losses. Therefore, those with such schemes would look at continuing with the old regime as the new one that does not give any deduction for the same.

“Allowing deductions for social security savings allowed under section 80C of the Income Tax Act (public provident fund, LIC premium, etc.,) and 80D (health insurance premium) in the new tax regime will be a win-win solution, and I am reasonably sure that by and large, all people will accept the new scheme if this is done," Jain said.

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(Edited by : Jomy Jos Pullokaran)