Tax Dilemma: Deciphering the Superior Regime for Salaried Workers – Embrace the Old or Embrace the New?
The fiscal landscape of Budget 2023 has stirred considerable perplexity among taxpayers, particularly concerning the selection between the traditional and contemporary tax regimes. The government’s endeavors to advocate for the adoption of the new regime were evident through various incentives unveiled in the 2023 Budget. These amendments underscore the government’s inclination towards steering taxpayers towards the new regime while maintaining the existence of the old one. Despite the default transition to the new tax regime, the option to adhere to the old regime persists.
Interim Budget 2024-2025 Report:
The Interim Budget 2024-2025 has sustained the status quo concerning direct taxes, with no alterations introduced.
Exploring both tax regimes is imperative to determine the optimal choice for 2024.
New Tax Regime:
The introduction of the new tax regime in Budget 2020 brought forth modifications in tax slabs and offered taxpayers concessional tax rates. However, opting for the new regime entails forfeiting several exemptions and deductions like HRA, LTA, 80C, and 80D, which diminished its attractiveness. In the wake of Budget 2023, five pivotal changes were introduced to incentivize the adoption of the new regime, which persist into FY 2024-2025. These changes include a higher tax rebate limit, streamlined tax slabs, standard deduction extension, reduced surcharge for high net worth individuals, and higher leave encashment exemption.
Default Regime:
As of FY 2023-24, the new income tax regime is set as the default choice. Taxpayers desiring to remain under the old regime must submit a form during return filing. The flexibility to switch between regimes annually is retained.
Old Tax Regime:
The old tax regime predates the advent of the new regime, offering over 70 exemptions and deductions, including HRA and LTA, to alleviate taxable income and minimize tax liabilities. Notably, Section 80C is among the most favored deductions, allowing for a substantial reduction in taxable income.
Selecting Between Old Vs. New Tax Regime: Which is Optimal?
The decision hinges on the tax-saving deductions and exemptions available under the old tax regime. A breakeven threshold has been calculated for various income levels, aiding in making an informed decision. This threshold reflects the point at which there’s no disparity in tax liability between the two regimes.
The fiscal landscape presented in Budget 2023 has led to significant ambiguity among taxpayers regarding the optimal choice between the conventional and contemporary tax regimes. The government, in its endeavor to promote the adoption of the new regime, unveiled various incentives in the 2023 Budget.
These alterations underscore the government’s inclination towards transitioning taxpayers to the new regime while preserving the existence of the old one. Despite the default transition to the new tax regime, taxpayers still retain the option to adhere to the old regime.
Interim Budget 2024-2025 Updates:
No amendments were introduced in direct taxes in the Interim Budget 2024-2025.
Examining Both Regimes: Choosing the Optimal Regime for 2024
New Tax Regime:
The introduction of the new tax regime in Budget 2020 brought about modifications in tax slabs, offering taxpayers concessional rates. However, opting for the new regime entails forfeiting several exemptions and deductions like HRA, LTA, 80C, and 80D, which diminished its attractiveness. In Budget 2023, the government introduced five key changes to encourage the adoption of the new regime. These changes persist into FY 2024-2025, as no amendments were made in the Interim Budget 2024. They include:
- Higher Tax Rebate Limit: Tax rebate on income up to ₹7 lakhs introduced, compared to ₹5 lakhs under the old regime.
- Streamlined Tax Slabs: Tax exemption limit raised to ₹3 lakhs with revised tax slabs.
- Standard Deduction Extension: Standard deduction of ₹50,000 extended to the new regime.
- Reduced Surcharge for High Net Worth Individuals: Surcharge rate on income over ₹5 crores reduced from 37% to 25%.
- Higher Leave Encashment Exemption: Exemption limit for non-government employees raised from ₹3 lakhs to ₹25 lakhs.
Default Regime:
The new income tax regime is set as the default option starting from FY 2023-24. Taxpayers preferring the old regime must submit a form during return filing. Annual switching between the two regimes remains an option.
Old Tax Regime:
The old tax regime, predating the new regime, offers over 70 exemptions and deductions, including HRA and LTA, to reduce taxable income and lower tax payments. The most significant deduction is Section 80C, allowing a reduction of taxable income up to ₹1.5 lakh.
Determining the Optimal Choice:
The decision hinges on the tax-saving deductions and exemptions available under the old tax regime. A breakeven threshold has been calculated for various income levels, facilitating an informed decision.
Here’s a detailed comparison of the deductions and exemptions available under both regimes:
| Particulars | Old Tax Regime | New Tax Regime (until March 31, 2023) | New Tax Regime (from April 1, 2023) |
|---|---|---|---|
| Income level for rebate eligibility | ₹ 5 lakhs | ₹ 5 lakhs | ₹ 7 lakhs |
| Standard Deduction | ₹ 50,000 | – | ₹ 50,000 |
| Effective Tax-Free Salary Income | ₹ 5.5 lakhs | ₹ 5 lakhs | ₹ 7.5 lakhs |
| Rebate u/s 87A | ₹ 12,500 | ₹ 12,500 | ₹ 25,000 |
| HRA Exemption | ✓ | X | X |
| Leave Travel Allowance (LTA) | ✓ | X | X |
| Other allowances | ✓ | X | X |
| Standard Deduction (₹ 50,000) | ✓ | X | ✓ |
| Entertainment Allowance and Professional Tax | ✓ | X | X |
| Perquisites for official purposes | ✓ | ✓ | ✓ |
| Interest on Home Loan u/s 24b (Self-occupied or vacant property) | ✓ | X | X |
| Interest on Home Loan u/s 24b (Let-out property) | ✓ | ✓ | ✓ |
| Deduction u/s 80C (EPF, LIC, ELSS, etc.) | ✓ | X | X |
| Employee’s (own) contribution to NPS | ✓ | X | X |
| Employer’s contribution to NPS | ✓ | ✓ | ✓ |
| Medical insurance premium – 80D | ✓ | X | X |
| Disabled Individual – 80U | ✓ | X | X |
| Interest on education loan – 80E | ✓ | X | X |
| Interest on Electric vehicle loan – 80EEB | ✓ | X | X |
| Donation to Political party/trust etc – 80G | ✓ | X | X |
| Savings Bank Interest u/s 80TTA and 80TTB | ✓ | X | X |
| Other Chapter VI-A deductions | ✓ | X | X |
| All contributions to Agniveer Corpus Fund – 80CCH | ✓ | Did not exist | ✓ |
| Deduction on Family Pension Income | ✓ | ✓ | ✓ |
| Gifts upto Rs 50,000 | ✓ | ✓ | ✓ |
| Exemption on voluntary retirement 10(10C) | ✓ | ✓ | ✓ |
| Exemption on gratuity u/s 10(10) | ✓ | ✓ | ✓ |
| Exemption on Leave encashment u/s 10(10AA) | ✓ | ✓ | ✓ |
| Daily Allowance | ✓ | ✓ | ✓ |
| Conveyance Allowance | ✓ | ✓ | ✓ |
| Transport Allowance for specially-abled person | ✓ | ✓ | ✓ |
How to Decide Between Old and New Tax Regimes?
When choosing between the two regimes, consider the tax exemptions and deductions available under the old tax regime. After deducting all eligible exemptions and deductions, determine the net taxable income. Compare the tax liability based on this income under both regimes, opting for the one with lower tax liability. Inform your employer of your choice for appropriate Tax Deducted at Source (TDS) deduction from your salary.
Conclusion:
The disparities between the old and new tax regimes prompt many individuals to deliberate over their choice. The new regime accommodates those favoring minimal deductions or seeking to avoid extensive tax preparation. However, the old regime incentivizes taxpayers to cultivate saving habits through numerous exemptions and deductions. Each regime presents distinct advantages and disadvantages, necessitating a thorough comparison based on individual circumstances to determine the most suitable option.
In Conclusion:
The choice between the old and new tax regimes necessitates a comprehensive assessment of individual circumstances and tax implications. While the new regime caters to those favoring simplicity and reduced deductions, the old regime appeals to individuals seeking extensive tax-saving avenues. Each regime possesses distinct advantages and disadvantages, underscoring the significance of informed decision-making based on individual financial profiles.
FAQs on Old Tax Regime vs New Tax Regime:
Here are detailed calculations and comparisons for different income levels:
| Income Level | Less: Standard Deduction | Net Income | Tax under both regimes | Additional Deductions Required in Old Regime to Break Even | Which Tax Regime to Choose: Old or New? |
|---|---|---|---|---|---|
| ₹7,00,000 | ₹50,000 | ₹6,50,000 | ₹0 | ₹1,50,000 | You will benefit only in new regime. |
| ₹8,00,000 | ₹50,000 | ₹7,50,000 | ₹36,400 | ₹1,38,500 | Old regime: if deductions > Rs 1,38,500; New regime: if deductions < Rs 1,38,500 |
| ₹9,00,000 | ₹50,000 | ₹8,50,000 | ₹41,600 | ₹2,12,500 | Old regime: if deductions > Rs 2,12,500; New regime: if deductions < Rs 2,12,500 |
| ₹10,00,000 | ₹50,000 | ₹9,50,000 | ₹54,600 | ₹2,50,000 | Old regime: if deductions > Rs. 2,50,000; New regime: if deductions < Rs 2,50,000 |
| ₹12,50,000 | ₹50,000 | ₹12,00,000 | ₹93,600 | ₹3,12,500 | Old regime: if deductions > Rs. 3,12,500; New regime: if deductions < Rs 3,12,500 |
| ₹15,00,000 | ₹50,000 | ₹14,50,000 | ₹1,45,600 | ₹3,58,000 | Old regime: if deductions > Rs. 3,58,000; New regime: if deductions < Rs 3,58,000 |
| ₹15,50,000 | ₹50,000 | ₹15,00,000 | ₹1,56,000 | ₹3,75,000 | Old regime: if deductions > Rs. 3,75,000; New regime: if deductions < Rs 3,75,000 |
| ₹16,00,000 | ₹50,000 | ₹15,50,000 | ₹1,71,600 | ₹3,75,000 | Old regime: if deductions > Rs. 3,75,000; New regime: if deductions < Rs 3,75,000 |
These tables provide clarity on the tax implications for various income levels under both the old and new tax regimes.
February 20, 2024