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While there are merits and demerits of both the old and new regimes, it becomes cumbersome for taxpayers to pick the best-suited tax regime. Based on the amendments proposed in Union Budget 2023, the new tax regime has been made as a default one, and the taxpayers will have to select the old tax regime if they wish to use it.
What is the New Tax Regime?
In the new income tax regime, lower income tax rates and more slabs with no option of availing tax exemptions and deductions have been made available for taxpayers. In a major boost to the new income tax regime and to make it more pleasing to the middle-class common individual, the government has announced significant changes to the new income tax regime. The basic exemption limit in the new tax regime has been increased to INR 3 lakh, which was INR 2.5 lakh earlier. Also, a tax rebate on income earned up to INR 7 lakh, which was INR 5 lakh earlier under section 87A.
Why Taxpayers May Abandon Old For New Regime?
Central Board of Direct Taxes (CBDT) Chairman Nitin Gupta, on October 10, 2023, said that around 70 percent of personal income taxpayers might transition to the new tax regime, as the FY24 Union budget has made it more attractive. Moreover, he highlighted that around 60 percent of corporate income is already taxed under the low tax rate regime. Features of the new tax regime are:
- Lower Tax Rates- The new tax regime brings in more tax slabs with lower tax rates, which can significantly impact your tax liability. In this regime, for Rs 0 to Rs 3 lakh income, no tax will be levied, and from Rs 3 lakh to Rs 6 lakh, a 5 percent tax would be charged, and for Rs 6 to Rs 9 lakh, the rate is 10 percent.
- Exemptions and Deductions Not Allowed: Unlike the old tax regime, the new one doesn’t allow several major exemptions and deductions, such as leave travel allowance (LTA), housing rent allowance (HRA), standard deduction of Rs 50,000, and deductions under Section 80C, 80D, and for interest paid on home loans, among others. Taxpayers who don’t prefer investing in tax-saving instruments and don’t qualify for any income exemptions may find the reduced slab rates of the new regime more advantageous.
Which Tax Regime is better?
With the changes in the new tax regime, an individual with INR 9 lakh annual income will pay INR 45,000 tax which is 5% of the salary, a reduction of INR 15,000 from the present INR 60,000 under the earlier slabs under the new tax regime. And, an individual with INR 15 lakh annual income will have to pay a tax of INR 1.5 lakh which will be down from INR 1.87 lakh.
However, in case the individual is eligible to claim for deductions/ exemptions under the old tax regime towards HRA, LTA, PPF, etc, the same may be more beneficial. Since the eligible deductions, sources, and quantum of income differ for every individual, one rule cannot be applied to all. Taxpayers will need to evaluate and compare the tax liability under both regimes and then decide on which to opt for. In case a taxpayer has investments in tax-saving instruments, pays premiums on life or a medical insurance policy, children’s school fee, home loan principal repayment, etc., and avails the benefit of the deduction for HRA, LTA, etc. it may be more beneficial to opt for old tax regime since the benefit of deduction/exemption can be availed in the old tax regime. The new tax regime permits a standard deduction of INR 50,000 for salaried persons and a deduction for family pension being lower of INR 15,000 or 1/3rd of the pension.
Bottom Line
As per the financial year 2023-24, the government has announced various steps to move towards a simpler tax regime which will help all taxpayers who opt for the new tax regime. These tweaks in the tax slabs will surely lessen the burden on taxpayers and allow individuals to plan their long-term financial goals more efficiently.
