With the Central Board of Direct Taxes (CBDT) notifying Income Tax (I-T) Return forms 1 and 4 for FY 2023-24 (AY 2024-25), the time has come to assess whether tax regimes – new or old – best fit you. From April 1, 2020 (FY 2020-21), the Government of India implemented a new tax rate regime for individuals and Hindu undivided families (HUF). The old tax regime was in place prior to the implementation of the new tax regime.
Union Finance Minister Nirmala Sitharaman said earlier this year in her Union Budget speech for 2023-24 that the Centre will make the new income tax regime the default tax regime. However, she stated that citizens will still be able to take advantage of the former tax regime.
New Income Tax System
The new tax regime, which adjusted the tax slabs, was introduced in Budget 2020. Taxpayers received reduced tax rates. However, the new tax structure excluded a number of exemptions and deductions, including HRA, LTA, 80C, 80D, and others.
Income from life insurance, agricultural income, standard rent reduction, retrenchment compensation, leave encashment on retirement, VRS earnings up to Rs 5 lakhs, Death cum retirement benefit, money earned as a scholarship for school, and so on are some of the deductions available under the new tax regime.
Here are the top six points to remember:
1. The new tax regime has been expanded to include six tax slab rates ranging from 0% to 30%. The lowest starts at Rs 3 lakh and the highest is Rs 15 lakh.
2. Section 87A introduced a complete tax credit on income up to Rs 7 lakh under this system. Under the previous tax scheme, this threshold was Rs 5 lakh.
3. The standard deduction of Rs 50,000 for salaried personnel remains in effect under the new tax regime.
4. Combined with the rebate, this amounts to Rs 7.5 lakhs in tax-free income under the new regime.
5. The surcharge on income beyond Rs 5 crore has been reduced from 37% to 25%. This change reduced the effective tax rate from 42.74% to 39%.
6. The exemption limit for non-government employees for leave encashment has been raised from Rs 3 lakh to Rs 25 lakh.
The previous income tax regime
1. Individuals could claim different tax deductions and exemptions to lower their taxable income under the previous tax regime. Section 80C, HRA, LTA, and other deductions and exemptions are available under the Old Tax Regime.
2. The most common deduction is under Section 80C, which allows for a reduction in taxable income of up to Rs 1.5 lakh.
3. Chapter VI-A of the previous tax code provides tax-saving investment deductions (80D, 80E, 80DD, 80DDB,, 80EE, 80EEA, 80EEB, 80G, 80GG, 80GGA, 80GGC, 80IA, 80-IAB, 80-IAC, 80-IB, 80-IBA, and so on).
4. It also provides deductions for Leave Travel Allowance and House Rent Allowance.
5. Section 80TTA/80TTB deductions are also possible (on interest from savings account deposits).
6. Tax relief on house loan interest paid for self-occupied or vacant property u/s 24
In addition, the regime provides tax breaks on popular tax-saving investment alternatives such as ELSS, NPS, and PPF, as well as a tax break on insurance premiums.
Is it better to have an old tax regime or a new tax regime?
This is a subjective question that will be determined by individual taxpayers. The main difference between the old and new tax regimes is that the previous tax regime has higher rates but offers tax reduction possibilities. The new regime includes marginally lower taxation but no options ffor tax reduction.
