In Budget 2023-24, Union Minister of Finance Nirmala Sitharaman announced major changes in personal income tax that not only brought in much-needed relief to the salaried class, but also clearly revealed that the new tax regime would now be the default one, and old tax regime would merely be a choice.
According to experts, the government is planning to gradually move taxpayers from the old tax regime to the new tax regime.
In the new tax regime, taxpayers can now claim a Standard Deduction of Rs 50,000, they can opt for new slab rates (which are at a lower rate of tax) and also claim deduction under Section 80CCD of the Income-tax Act, 1961 towards contribution to the National Pension System (NPS) made by the employer.
Says Archit Gupta, founder and CEO, Clear, a tax portal: “The new tax regime allows taxpayers to invest via saving in instruments of their choice. There is no tax benefit to invest via Section 80C. Essentially, taxpayers will now have to become more adept at planning their financial goals and deciding which instruments to opt for. Whether these instruments offer tax deductions will now have to be kept out of consideration. However, how receipts or accumulations will be taxed shall have to be considered now. In the old tax regime, taxpayers were driven to move their funds to certain instruments to claim tax relief.”
It is in this context, it is important to understand the difference between the new tax regime and the old tax regime.
New Tax Regime: The Indian income tax system levies tax on individual taxpayers based on the income or profits earned by them, which is commonly called taxable income.
It was in the financial year 2020-21, that the new tax regime was announced for Individuals and Hindu Undivided Family (HUF) in Budget 2020.
Accordingly, individuals could opt for reduced tax rates with no option for claiming exemptions and deductions. At the time of introduction, the new tax regime had seven different slabs. After three years of introduction, the government reduced both the slab count and the tax rates under the new tax regime in Budget 2023, as the new tax regime proved to be unpopular with taxpayers.
At present, the new tax regime has six slabs, each having a lower rate of tax for income up to Rs 15 lakh. Also, in the new tax regime, all the exemptions and deductions that taxpayers used in the old tax regime will be unavailable.
“The new tax regime gives flexibility to taxpayers to invest their money as they prefer. In this case, there’s no obligation to tax-saving schemes and insurance plans, which may not be in alignment with their long-term financial goals,” says Suneel Dasari, founder and CEO, EZTax, an online income tax filing portal.
Old Tax Regime: Under the old structure of taxation, the assessee can claim the deduction, exemptions, and allowances with which they can properly plan and saves their taxes.
The deductions under the old tax regime are as follows: Public Provident Fund (PPF), Equity-Linked Savings Schemes (ELSS), Employees’ Provident Fund (EPF), life insurance premium, principal and interest component of home loan, health insurance premiums, investment in NPS, tuition fee for children, and saving account interest.
The exemptions are here as follows: house rent allowance, leave travel allowance, reimbursement for mobile and Internet, food coupons or vouchers, company-leased car, Standard Deduction, uniform allowance, and leave encashment.
Old Tax Regime Vs New Tax Regime: Both the old and the new tax regime have their drawbacks and benefits. While the old tax regime has exemptions and deductions under numerous sections, the new tax regime gives more flexibility to people and simplifies the tax process.
“It all depends on whether you want to claim deductions and exemptions under the new tax regime, which includes a variety of income levels and rates. Deductions and exemptions are available under the old tax regime. Before you submit your taxes, you should do a comparative evaluation and assessment under both the tax systems. This way you can plan your taxes ahead and invest accordingly. The calculator also suggests which regime is suitable for you,” says Anup Bansal, chief business officer, Scripbox, a digital wealth management service.
With the new tax regime, those earning up to Rs. 3 lakh will pay nil tax, whereas, in the old regime, this was limited to income up to Rs. 2.5 lakh.
“For those earning between Rs. 3 lakh and Rs. 6 lakh, the tax rate has remained unchanged at five per cent, making it more favourable. However, for higher income brackets, the tax rate has increased, with those earning above Rs. 15 lakh now paying 30 per cent as compared to the old regime. The new tax regime presents a clear shift towards a more progressive approach, balancing the burden of taxation fairly between different income groups,” says Rajiv Bajaj, chairman and managing director, Bajaj Capital.
According to Dasari, if you have deductions up to Rs 3.5 lakh (Rs 1.5 lakh under Section 80C, Standard deduction of Rs. 50,000, and home loan interest of up to Rs 1.5 lakh), the new regime would be beneficial.
“Having said that, if your investment is more than Rs 3.5 lakh, the old regime is beneficial. However, it all depends on the kind of income one has,” adds Dasari.
