Navigating Tax Choices: Look At Old & New Tax Regimes
Choosing the Right Tax Regime for Filing ITR
Deciding which tax regime to choose when filing your Income Tax Return (ITR) depends on various factors, such as income level, investment habits, and available deductions. The tax slabs were updated in the interim budget announced on February 1, 2024, while the tax rates, health and education cess, and surcharges remain unchanged for the Assessment Year (AY) 2024-25. Understanding terms like tax rebate, standard deduction, surcharge, and health & education cess is crucial for accurate tax calculation.
TAX REBATE
The Indian government introduced a rebate under Section 87A in 2013-14 to reduce the income tax liability of certain taxpayers. Under the old regime, individuals with a taxable income up to Rs. 5,00,000 are eligible for a tax rebate of up to Rs. 12,500. The Budget 2023 expanded this benefit under the new tax regime, offering a tax rebate of Rs. 25,000 for individuals with taxable income up to Rs. 7,00,000. Income Tax Rebate Under Section 87A is a refund on taxes when the tax liability is less than the taxes the individual has paid.
STANDARD DEDUCTION
The Income Tax Act allows salaried individuals and pensioners to claim a standard deduction of up to Rs. 50,000 without requiring any specific investment or expenditure. This deduction helps reduce taxable income directly.
HEALTH & EDUCATION CESS
This cess is collected by the government to fund healthcare and educational initiatives, particularly for rural and below-poverty-line families. The rate is 4% of the income tax liability.
SURCHARGE
A surcharge is an additional tax levied on high-income
earners whose income exceeds
certain thresholds. The rates are as follows:
- 10% of income tax if total income > Rs. 50 lakh and < Rs. 1 crore
- 15% of income tax if total income > Rs. 1 crore and < Rs. 2 crore
- 25% of income tax if total income > Rs. 2 crore and < Rs. 5 crore
- 37% of income tax if total income > Rs. 5 crore
*Note: As of April 1, 2023, the highest surcharge rate of 37% has been
reduced to 25% under the new tax regime.
For income from dividends and capital gains taxable under sections 111A,
112A, and 115AD, the highest surcharge rate will be 15%. Additionally, the
surcharge rate for an Association of Persons (AOP) consisting entirely of
companies is capped at 15%.
| Income Slabs | New Regime (Sec 115 BAC) | Old Regime | ||
|---|---|---|---|---|
| Age Below 60 Years & NRIs | Age Between 60 Years to 80 Years | Age Above 80 Years | ||
| Up to Rs. 2,50,000 | NIL | NIL | NIL | NIL |
| Rs. 2,50,000 – Rs. 3,00,000 | NIL | 5% | NIL | NIL |
| Rs. 3,00,001 – Rs. 5,00,000 | 5% | 5% | 5% | NIL |
| Rs. 5,00,001 -Rs. 6,00,000 | 5% | 20% | 20% | 20% |
| Rs. 6,00,001 – Rs. 7,50,000 | 10% | 20% | 20% | 20% |
| Rs. 7,50,001 – Rs. 9,00,000 | 10% | 20% | 20% | 20% |
| Rs. 9,00,001 – Rs. 10,00,0007 | 15% | 20% | 20% | 20% |
| Rs. 10,00,001 – Rs. 12,00,000 | 15% | 30% | 30% | 30% |
| Rs. 12,00,001 -Rs. 12,50,000 | 20% | 30% | 30% | 30% |
| Rs. 12,50,001 – Rs. 15,00,000 | 20% | 30% | 30% | 30% |
| Rs. 15,00,000 and above | 30% | 30% | 30% | 30% |
OLD TAX REGIME
The old tax regime offers approximately 70 deductions and exemptions, allowing taxpayers to reduce their taxable income significantly. These include deductions for investments in Public Provident Fund (PPF), Equity Linked Savings Scheme (ELSS), National Savings Certificate (NSC), contributions to schemes like Employees' Provident Fund (EPF), and Public Provident Fund (PPF). Exemptions are also available for House Rent Allowance (HRA), Leave Travel Allowance (LTA), and medical insurance premiums under sections 80C, 80D, 80E, 80G, among others.
NEW TAX REGIME
Introduced in the 2020 Union Budget and revised in the 2023 Budget under Section 115BAC, the new tax regime offers lower tax rates but fewer exemptions and deductions. Individuals earning up to Rs. 7 lakhs annually are exempt from paying taxes, benefiting from a standard deduction of Rs. 50,000 and a tax rebate of Rs. 25,000. However, popular deductions under sections like 80C, 80CCD(1b), 80D, and others are not available in the new regime.
There are a total of 70 deductions and exemptions that are not allowed under the new tax regime. The most commonly used ones include:
| DEDUCTION & TAX EXEMPTIONS | OLD REGIME | NEW REGIME |
|---|---|---|
| HRA |  |
 |
| LTA | |
|
| Food Allowance | |
|
| Exemption on Voluntary Retirement u/s 10(10C) | |
|
| Exemption on Gratuity u/s 10(10) | |
|
| Exemption on Leave Encashment u/s 10(10AA) | |
|
| Transport allowance for a specially-abled person | |
|
| Professional tax | |
|
| Interest on home loan u/s 24B on Self occupied Property | |
|
| Interest on home loan u/s 24B on Let out property | |
|
| Interest on home loan u/s 24B on Vacant property | |
|
| Deduction u/s 80C | |
|
| NPS Self contribution u/s 80CCD(1B)_ | |
|
| NPS Self contribution u/s 80CCD(2) | |
|
| Medical insurance premium u/s 80D | |
|
| Interest on education loan u/s 80E | |
|
| Interest on electric vehicle loan u/s 80EEB | |
|
| Donation to political party u/s 80G | |
|
| Saving bank interest u/s 80TTA | |
|
| Disable individual u/s 80U | |
|
Conclusion:
• Old Regime: Beneficial if you have significant deductions and exemptions. It requires more documentation and investment in tax-saving instruments.
NEW TAX REGIME
New Regime: Simpler and might result in lower taxes if you do not have substantial deductions. Suitable for those who prefer a straightforward approach without the need to invest in specific tax-saving instruments.
The best choice depends on your individual financial situation. It's advisable to calculate your tax liability under both regimes before making a decision or consult with a tax advisor for personalized advice.
- Renukadas Kulkarni,
Intern.