New Delhi: It is that time of the year when one has to make a call whether to opt for the old tax regime or the new one. Filing income tax returns is a significant financial obligation for individuals, and understanding the different tax regimes is crucial for accurate reporting. With the introduction of the new tax regime in the Union Budget 2020, taxpayers have been presented with an alternative to the existing old tax regime.
The new tax regime promises lower tax rates but comes with a trade-off: removing several exemptions and deductions. The government has given the option to the taxpayers to choose between the old and new tax regimes.
New Tax Regime
On February 1, 2020, Finance Minister Nirmala Sitharaman presented the Budget 2020, which included significant announcements, including introducing the New Tax Regime. Introducing the new tax regime aimed to simplify the tax structure and reduce the compliance burden on taxpayers. The key distinction between the two tax regimes lies in the income tax slab rates and the eligibility to claim exemptions and deductions.
The new regime disallowed several exemptions and deductions, such as HRA, LTA, 80C, 80D and more. To promote the new regime, the Union Budget for 2023-24 brought about revisions to the tax slabs specifically for the new regime, along with other changes. These changes are as follows:
Higher Tax Rebate Limit: The new tax regime now offers a total tax rebate on income up to ₹ seven lakhs, a significant increase from the Rs 5 lakh threshold in the old tax regime. This means that taxpayers with an income of up to ₹ seven lakhs will be completely exempt from paying any tax under the new tax regime.
Streamlined Tax Slabs: The tax exemption limit has been raised to ₹ three lakhs, although specific details regarding the new tax slabs were not provided in the given information.
These changes seek to make the new tax regime more appealing to taxpayers by providing increased benefits and simplifying the tax structure.
Old Tax Regime
The old tax regime refers to the tax system that was in place prior to the introduction of the new tax regime. In the old regime, taxpayers can access a wide range of exemptions and deductions, totalling more than 70. These include popular deductions like HRA (House Rent Allowance) and LTA (Leave Travel Allowance), which can reduce taxable income and lower tax payments.
One of the most significant deductions available in the old tax regime is Section 80C, which allows taxpayers to reduce their taxable income by up to Rs.1.5 lakh. This deduction encompasses various investments and expenses, such as contributions to the Employee Provident Fund, Public Provident Fund, life insurance premiums, and tuition fees.
Basic Exemption Limit
Under the new tax regime, the basic tax exemption limit will remain unchanged for all assesses, including senior citizens. This means opting for the new regime will not provide additional tax exemption for senior and super-senior citizens.
Enhancements and Changes in Tax Provisions
Standard Deduction: The standard deduction of Rs 50,000, previously available only under the old tax regime, has also been extended to the new tax regime. This means taxpayers can claim a standard deduction of Rs 50,000 from their salary income, reducing their taxable income. Under the new regime, along with other deductions and rebates, this can result in a tax-free income of up to Rs 7.5 lakhs.
Family Pension Deduction: Individuals receiving family pensions can claim a deduction of either Rs 15,000 or 1/3rd of the pension amount, whichever is lower. This deduction helps in reducing the taxable portion of the family pension received.
Reduced Surcharge for High Net Worth Individuals: For high net worth individuals with income exceeding Rs 5 crores, the surcharge rate has been reduced from 37% to 25%. This reduction in surcharge brings down their effective tax rate from 42.74% to 39%, providing some relief to individuals in this income bracket.
Higher Leave Encashment Exemption: The exemption limit for leave encashment has been raised for non-government employees. Previously set at Rs 3 lakhs, it has now been increased to Rs25 lakhs, resulting in an eight-fold increase. This higher exemption limit allows non-government employees to enjoy tax benefits on a more significant portion of their leave encashment amount.
Default Regime: Starting from the financial year 2023-24, the new income tax regime will be set as the default option. If taxpayers wish to continue using the old regime, they must submit a form when filing their tax return. Taxpayers can switch between the two regimes annually based on their circumstances and tax-saving preferences.
Changes in Deductions and Exemptions under the New Tax Regime
The New Tax Regime brought significant changes to tax exemptions and deductions. Here is a breakdown of what deductions have been removed and what deductions are still covered under the New Tax Regime: