A new tax regime with streamlined regulations that drastically lowered exemptions and deductions was unveiled in Budget 2020. The government made a number of adjustments to incentivize more taxpayers to choose this regime and take advantage of its benefits.
A standard deduction was introduced, the basic exemption limit was raised to Rs 3 lakh (from Rs 2.5 lakh in the previous regime), tax slabs were expanded, the surcharge on incomes above Rs 5 crore was lowered from 37 per cent to 25 per cent, and individuals earning up to Rs 7 lakh were guaranteed to pay no taxes.
Expansion of exemption in LTCG tax
In order to bolster investor confidence and stimulate additional capital market investment, the government is contemplating an increase in the current exemption limit from Rs 1 lakh to Rs 2 lakh.
Since the fiscal year 2018–19, transfers of equity shares or units of equity-oriented mutual funds that are subject to Securities Transaction Tax (STT) at the time of acquisition have resulted in long-term capital gains (LTCG) exceeding Rs 1 lakh, subject to 10 per cent taxation without indexation benefits.
NPS exemption For new regime
The government may expand the deduction for self-contributions to NPS under the new tax regime as well, given its emphasis on encouraging investments in NPS over traditional instruments.
The employer's contribution to the National Pension System (NPS), which is capped at 10 per cent of salary (sum of basic and dearness allowance), is deducted equally under both the old and new tax regimes.
Nevertheless, deductions for an individual's personal NPS contributions are only permitted under the old tax regime and are capped at Rs 50,000.
Increasing standard deduction
A standard deduction was introduced a few years ago to replace the exemptions for medical reimbursement and conveyance allowances for salaried individuals.
There is a proposal to raise the current standard deduction limit of Rs 50,000 to at least Rs 1 lakh in order to address the ongoing rise in medical and fuel costs.
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