Controversy On New Tax Regime – No Clarity Before Litigation Challenges It?

Now, it's the end of the present financial year i.e., 2023-2024, and the policy analysts and tax fraternity are making a hush that the new tax regime will offer fewer tax deductions and exemptions as compared to the old tax regime, which provides various deductions under Chapter VI A from taxable income. The new financial year has started, and every individual or company are in a dilemma, as to tax avoiding measures to save their money. It is therefore not wrong to say that the society is guided by jingling of coins. For a moment, lets keep aside the sociological impact of taxes & income, and discuss present on the arguments of tax regime which has seized the sleepy convenience of public at large.

Chapter VI A of the Income Tax Act, 1961 contains specifics regarding some of the most popular deductions that one can claim to reduce the annual tax outgo. However, Chapter VI A deductions can only be claimed upon fulfilling certain conditions like making specific tax saving investments or expenditures like payment of tuition fees, home loan principal, life insurance and health insurance premium, etc. These tax saving options available under Chapter VI A of the Income Tax Act can be used to optimize annual tax planning efforts.

Some of the popular Section 80 sub-sections and the types of investments, expenses or donations that allow tax savings, are:

1. Section 80C: This is one of the most popular and availed sections under chapter VI A. It allows the most tax deductions of Rs.1.5 lakh when clubbed with Sections 80CCC and 80CCD(1). Deductions under chapter VI A for Section 80C are made possible because of various investments that allow deductions and help generate tax returns. Taxpayers need to remember that to avail of benefits in a financial year under this section of chapter VI A, the investments also need to be made in the same financial year. The section applies not only to investments but also to expenditures.

The expenditures and investments that can be claimed for deductions u/s 80C of chapter VI A, are Employee Provident Fund (EPF) & Voluntary Provident Fund (VPF), Public Provident Fund (PPF), Life Insurance Policy Premiums, Contribution to National Pension System (NPS), Payment of Tuition Fees, Unit Linked Insurance Plan (ULIP), Five-Year Tax Saver FDs, Sukanya Samriddhi Yojana, Equity Linked Savings Scheme (ELSS), National Savings Certificate (NSC), Senior Citizen Savings Scheme (SCSS), Five-Year Post Office Time Deposit (POTD) Scheme, Home Loan Principal Repayment etc.

2. Section 80CCC: The section of chapter VI A is responsible for deductions made against contributions to pension schemes and clubbed with 80C and 80CCD (1), the deduction limit goes up to Rs. 1.5 lakh.

3. Section 80CCD (1): Contributions made to the central government's pensions funds are eligible for deductions under the section with limit up to Rs. 1.5 lakh. If you are an employee, 10% of your basic salary and dearness allowance will be exempt from tax. In any other case, 20% of total income will be tax-free, but the limit remains the same.

4. Section 80CCD (1B): Deductions under chapter VI A for this sub-section of 80CCD are considered for pension schemes i.e., National Pension System (NPS)/NPS Swavalamban and Atal Pension Yojana, for which tax exemption is restricted to Rs. 50,000.

5. Section 80D: Chapter VI A deductions under this section are made on health insurance premiums and premium paid for critical illness rider of life insurance policies. The maximum tax deduction limit under this provision is Rs. 1 lakh for paying health insurance premium for self and parents.

6. Section 80E: This provision does not entail any upper limit on deductions and benefits of this provision applies to interest payments made towards loans taken for higher education.

7. Section 80G: This provision deals with donations to funds or charitable institutions, and the nature of the doner determines the deduction limit, which may extend up to 100% of the donated amount.

Now, there are rumours going on that the new income tax regime has become the default option for taxpayers commencing from fiscal year 2024-25, and the taxpayers who fail to specify their preference between the old and new regime will have their taxes processed under the latter. However, taxpayers wishing to adhere to old taxation norms have been granted flexibility to change their preference, allowing them to switch between old and new regimes.

Although, salaried individuals have the flexibility to switch between the new and old tax regimes multiple times within each financial year, the individual professionals/ persons having income source from business are not provided such relaxation. Moreover, the new tax regime offers fewer tax deductions and exemptions compared to the old tax regime, which provides various deductions under Chapter VI A from taxable income.

Individuals with income from business or profession have only one-time choice while filing their returns. For example, if an individual with business income switches from the old to the new regime in FY2023, he will not be eligible to switch again, and once he opts out of the new tax regime, he cannot opt back in for the new tax regime in the future.

After the statements given by tax pundits that the exemptions & deductions available in the old regime are not applicable to the new regime, it is clarified that no tax was to be levied if the taxable income after all deductions under the old regime comes to less than Rs. 5 lacs, whereas, the entire income will be tax-free if the taxable income is within the bracket of Rs.7 lakh under the new regime.

So, even if on one hand, there are restrictions on claiming standard deduction as well as Chapter VI A deductions under the new regime while filing the ITR, there are some exemptions too. It is not wrong to say that every nook & corner is not disruptive, but, yes, there are some loopholes.

A perfect example of this cacophony is Section 145A of the Income tax Act, which says that for the purpose of determining the income chargeable under the head "Profits and gains of business or profession", the valuation of purchase and sale of goods or services and of inventory shall be adjusted to include the amount of any tax, duty, cess, or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods or services to the place of its location and condition as on the date of valuation.