New Tax Regime: What You Need to Know! New Tax vs Old Tax.
The New Tax Regime introduced by the government in Budget 2020 has undergone some changes in Budget 2023. The new regime offers lower tax rates but with fewer exemptions and deductions. The old regime, on the other hand, allows taxpayers to claim various deductions and exemptions but at higher tax rates. The choice between the two regimes depends on your income level, tax-saving investments and expenses.
Lets compare the old and new tax regimes and help you decide which one is better for you.
Features of the New Tax Regime
The new tax regime has the following features:
– It is optional for individuals and HUFs. You can switch between the regimes every year if you have no business income. However, if you have business income, you can switch only once and then you will be locked in the new regime.
– It offers lower tax rates for different income slabs. The tax rates range from 0% to 30%, with the lowest starting at Rs 3 lakh. The highest tax rate of 30% applies to income above Rs 15 lakh.
– It does not allow you to claim most of the deductions and exemptions available under the old regime. Some of the common deductions and exemptions that are not available under the new regime are:
– Section 80C (investments in PPF, ELSS, insurance, etc.)
– Section 80D (health insurance premium)
– Section 80TTA/TTB (interest on savings account/post office deposits)
– Section 24 (interest on home loan)
– Section 10(13A) (house rent allowance)
– Section 10(14) (leave travel allowance)
– Standard deduction of Rs 50,000 for salaried individuals
– Deduction of Rs 15,000 for family pension
– It allows you to claim a full tax rebate if your income is up to Rs 7 lakh. This means that you will not have to pay any tax if your income is up to Rs 7 lakh. This rebate is higher than the rebate of Rs 5 lakh available under the old regime.
– It reduces the surcharge rate for high net worth individuals (HNIs) with income above Rs 5 crore from 37% to 25%. This lowers their effective tax rate from 42.74% to 39%.
– It increases the exemption limit for leave encashment for non-government employees from Rs 3 lakh to Rs 25 lakh.
Comparison of Old and New Tax Regimes:
To compare the old and new tax regimes, let us take an example of a salaried individual with an annual income of Rs 10 lakh. Let us assume that he/she claims the following deductions and exemptions under the old regime:
– Standard deduction of Rs 50,000
– Section 80C deduction of Rs 1.5 lakh
– Section 80D deduction of Rs 25,000
– HRA exemption of Rs 1 lakh
– LTA exemption of Rs 20,000
The following points show the tax liability under both regimes:
– Under the old regime, the taxable income is Rs 6.4 lakh (Rs 10 lakh minus deductions and exemptions). Gross salary = ₹10,00,000 Exemptions & allowances = ₹1,50,000 Deductions = ₹1,75,000 GTI = ₹10,00,000 – ₹1,50,000 – ₹1,75,000 = ₹6,75,000 NTI = ₹6,75,000 (assuming no losses)
Tax liability = ₹12,500 + 20% of (₹6,75,000 – ₹5,00,000) = ₹47,500
If you have a Section 80G deduction of ₹35,000 due to donations to eligible funds or institutions
Your NTI will be ₹6,40,000 (₹6,75,000 – ₹35.000)
Taxable income = Rs 6,40,000. Tax up to Rs 2.5 lakh = 0 Tax on 2.5-5 lakh of 5% = 12,500 Tax on 5-6.4 lakh of 20% = 28,000
Cess of 4% on (12,500 + 28,000 = 40,500)
40,500 * 4/100 = Rs. 1620
40,500+1620
Net tax = Rs 42,120
– Under the new regime, the taxable income is Rs10 lakh (no deductions or exemptions).
Up to Rs. 3 lakh = 0 Rs. 3 lakh – Rs. 6 lakh 5% = Rs. 15,000 Rs. 6 lakh – Rs. 9 lakh 10% = Rs. 30,000 Rs. 9 lakh – Rs. 10 lakh 15% = Rs. 15,000
Total – Rs. 60,000
For your income of Rs. 10 lakh and no deductions or exemptions, if you opt for the new tax regime, your cess and surcharge amount would be:
Cess: 4% of Rs. 60,000 = Rs. 2,400
Surcharge: 0 (as total income is less than Rs. 50 lakh)
Total cess and surcharge: Rs. 2,400.
Therefore, your total tax liability under the new regime would be Rs. 62,400.
Conclusion:
The new tax regime may seem attractive with its lower tax rates and simpler compliance. However, it may not suit everyone as it takes away many deductions and exemptions that can reduce your taxable income significantly. Therefore, you should compare both regimes carefully and choose the one that maximizes your tax savings.
You can use online tools like ClearTax’s Old vs New Tax Regime Calculator to compare both regimes based on your income and expenses. You can also consult a tax.
Thank you for reading this post. I hope you found this informative and useful. Please share your thoughts, opinions, and suggestions in the comments below.
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