Introduction
Every year, taxpayers await the budget announcement with excitement, expecting changes in the income tax slabs. This year, 2024, the finance minister announced that there will be no changes to the income tax rates in the country. So what are the income tax slabs?
The government introduced income tax slabs to ensure a fair distribution of the tax burden for individual taxpayers in the country. In this system, different rates of tax are applicable for different income slabs. It is designed in such a way that people with higher incomes pay a higher tax while those with lower incomes pay a lesser tax.
This system has proven to be an efficient way of collecting taxes, contributing effectively to economic progress in the country. The income tax changes are announced during the budget every year. Now there are two types of income tax slabs in India: the old tax regime and the new tax regime. The taxpayer can choose either option. As per the income tax rules, if the taxpayer fails to submit his option, the new tax regime will be considered by default, and the employer will deduct the tax accordingly.
The Old Tax Regime explained
The old tax regime is savings oriented. There is a plethora of exemptions for savings and investments in this scheme. This has been an important incentive for people to save, invest, and insure their future. The savings-oriented tax exemptions are the perfect encouragement for taxpayers to save. The insurance exemption helps to cover life risks. The old scheme provides an incentive for people to save. They can avoid the adverse effects of inflation through investment. The old scheme helps in the creation of household savings, which form an important asset for the economic progress of the nation. This benefit is not available in the new tax regime.
The New Tax Regime Unveiled
The finance ministry introduced the new tax regime on April 1, 2020 (FY 2020-21) with lower tax rates and fewer deductions. It has been made the default regime for the financial year 2023-24 under Section 115BAC(1A) introduced in the Finance Act, 2023. The taxpayers have the option to choose between the old and new scheme.
The revised tax slabs and the concessional tax rates apply uniformly to individuals and businesses in this regime. The option is available until filing the return for the assessment year 2024-25. If the employees fail to inform their preference, the employers will deduct tax from salary income as per the new regime. Taxpayers who wish to avail themselves of the new tax regime must file the tax before the deadline expires because, for belated returns filed, the new regime is applicable by default.
Benefits of the Old Tax Regime
The old tax regime offers various deductions under allowances like house rent allowance, leave travel allowance, etc that are included in the salary. The exemptions under various sections are as follows:
- Under Section 80C, deductions are available up to 1.5 lakh rupees for specified investments and expenditures.
- under section 80D, deductions can be availed for premium paid to health insurance policies
- under section 80 CCD(1B) for additional investment in National Pension Scheme up to Rs.50000/-
- Interest paid on home loans up to a maximum of Rs. 2 lakhs
- Interest paid on education loan
- House rent allowance (HRA)-This allowance is available to taxpayers who live in rented accommodation under Section 10 (13).
- Leave travel allowance under Section 10(C) is exempt from income tax.
Details of deductions available under Section 80C
- Life Insurance policy-The premiums and payouts from life insurance plans qualify for tax exemption.
- EPF and PPF- contributions to employee’s provident fund and public provident fund are eligible deductions under this section.
- National Savings Certificate (NSC): The investment under the NSC is eligible for income tax deduction, but the interest earned on this investment is taxable. If the interest is reinvested, it is eligible for deduction.
- Bank fixed deposits (FDs): Tax saver term deposits for a term of five years qualify for deduction under this section. But the interest earned on this deposit is taxable.
- Post office term deposit: term deposit invested with the post office for five years can be included for deduction under this section.
- Home Loans- Instalments paid towards the principal of home loans are qualified for tax deduction.
- Education Loan-payment towards education loans for higher education by the taxpayer, their spouse, and their children is eligible for income tax deduction.
- Mutual funds and equity linked savings schemes (ELSS)-The amount invested in mutual funds and ELSS during the financial year is eligible for deduction under this section.
- Unit linked insurance policy (ULIP)- Investment in ULIPs for self, spouse, and children by the taxpayer can be availed of for tax deduction.
- Stamp duty and registration-The stamp duty and registration fee incurred during the transfer of property are subject to deduction under income tax under this section.
- Annuity and retirement savings plans: Contributions to annuity schemes or retirement National pension system (NPS)- An employee can claim a deduction up to Rs.1,50,000/-or ten per cent of basic salary, whichever is lower, by contributing to tier-1 of NPS account under this section.
- Sukanya samriddhi yojana- Contribution to this scheme are eligible for tax deduction
- Tuition fees- Fees for education for up to two children in a university, school or college located in India qualify for income tax deductions under this section.
Deductions under section 80 D
Premiums paid for medical insurance by the taxpayer, his spouse, and children are eligible for deduction under this section. deduction up to 25,000 rupees for individuals and up to 50,000/- rupees for senior citizens is available. Preventive health check-ups also covered under this section.
Deductions under section 80DD-Medical expenses for the treatment of disabled dependents are eligible for deduction under this section.
Deductions under section 80G
Donations to charities, prime ministers’ national relief fund, national defence fund, national children’s fund, etc. qualify for deduction under this section.
Apart from these, there are many other deductions available, like deductions for expenses on mobile, and telephone, books and periodicals, food coupons, reallocation expenses, donating to political parties, etc.
Benefits Offered by the New Tax Regime
Taxpayers can avail themselves of many benefits in the new tax regime. But exemptions under specific deductions like house rent allowance, leave travel allowance, savings and investments, loan installment deductions under Section 80C, medical insurance under Section 80D, and other deductions available in the old tax regime are not available in the new tax regime. By eliminating various deductions and exemptions, the new regime simplifies and streamlines compliance, saving time and effort for taxpayers. The benefits of the new income tax regime are as follows:
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Simplified tax planning
As there are no deductions or exemptions except standard deductions, tax calculations are simple.
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Lower tax rates
The tax rates are lower compared to old regime. The basic exemption limit is Rs. 3 lakhs for all individuals, irrespective of age, and the highest rate is 30% applicable on an income above Rs. 15 lakhs.
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Higher liquidity
As deductions towards savings and investment are not required, the taxpayers have higher disposable income and higher liquidity. They can spend more and make objective based investments.
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Standard deductions
Standard deductions of Rs. 50,000/- for salaried people and Rs. 15,000/-for pensioners are available in the new regime.
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Tax rebate
The tax rebate, which was available for income up to Rs 5 lakh, has been increased to Rs 7 lakh under Section 87A. So people with a total income up to 7 lakhs enjoy 100% income tax rebate.
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Higher leave encashment exemption
Non-government employees can now avail a higher leave encashment exemption limit. It has been increased from 3 lakh rupees to 25 lakh rupees, according to Section 10 (AA).
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Contribution to Agniveer Corpus
A deduction is available for the amount paid or deposited in the Agniveer Corpus Fund under Section 80CCH (2).
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Contribution to NPS
Deductions under subsection (2) of Section 80CCD (employer contribution on account of the employee in a notified pension scheme-mainly NPS) and Section 80 JJAA (for new employment) are available under the new regime.
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Surcharge reduction for high net worth
The surcharge for income exceeding 5 crore rupees is reduced to 25% from 37%. This will lower the effective rate from 42.74% to 39%.
Considerations for Individual Taxpayers
Income tax for individual taxpayers in india is based on their residential status and the source of income as per the different tax slabs for income earned specified by the government. The individual taxpayer can opt for either the old tax regime with various deductions and exemptions or the new tax regime, where they pay tax at lower rates while forgoing certain specific exemptions and deductions available in the old tax regime.
In the 2023 budget, the exemption limit for income was raised from 5 lakh rupees to 7 lakh rupees. They will still enjoy the standard deductions of Rs.50000/- for salaried people and Rs.15000/- for pensioners. The total number of tax slabs have also been reduced to five. The option for either old or new tax regime can be changed in subsequent years. Tax is calculated on the total income calculated with the tax rates and rules as applicable on the first day of April of each year. Salary income for individuals includes all amounts, either in cash or kind, that accrue on account of their employment.
Which one is better old or new tax regime for an individual?
For a taxpayer who has long term financial goals and has investments in tax-savings plans, insurance plans, medical insurance, etc., the old tax regime is beneficial.
Example1: Taxpayer “A” has an income of Rs. 10,000, exemption for HRA of 1,20,000, exemption for LTA-50,000, standard deduction-50000/-deductions under 80C (EPF, PPF, insurance, etc.)
Calculation under old tax regime and new tax regime
| Old tax regime (in Rs) | New tax regime (in Rs)
|
|
| Income
|
1000000 | 1000000 |
| Less exempt HRA | 120000 | Not applicable |
| Less exempt LTA | 50000 | Not applicable |
| Less standard deduction | 50000 | 50000 |
| Less deduction under 80C | 150000 | Not applicable |
| Net taxable income | 630000 | 950000 |
| income tax + health and education cess | 40040 | 57900 |
Example 2: Taxpayer 2- Salary 10,00,000; No HRA, LTA deductions
Calculation of income tax under old tax regime and new tax regime
| Old tax regime (in Rs) | New tax regime (in Rs)
|
|
| Income
|
1000000 | 1000000 |
| Less standard deduction | 50000 | Not applicable |
| Less deduction under 80C | 150000 | |
| Net taxable income | 800000 | 950000 |
| income tax + health and education cess | 75400 | 57900 |
As we can see from the above examples, for individuals who can claim exemptions under HRA, LTA, PPF, etc., the old regime is beneficial, whereas in the second example, we see that the new regime is more beneficial.
So since the eligible deductions, exemptions, and income differ for every individual, a general rule cannot be applied. Taxpayers must evaluate and compare the tax liability under each scheme, see which regime is beneficial and choose the same.
Duties of the taxpayer
It is the responsibility of the taxpayer to estimate the tax on his total income at the beginning of the year and make advance tax payments at specific intervals- during the financial year as required by the Income Tax act, 1961. The employer, on his part, must deduct the tax at source as per the assessment for the financial year. It is important for taxpayers to understand their obligations to pay advance tax and avoid the consequences of non-payment or short payment. Advance tax must be paid by all assessees who is liable to pay more than Rs.10000/-in a financial year. It is also the responsibility of individual taxpayers to file their returns before the due date given by the income tax authorities.
Impact on Business Entities
Domestic and foreign corporations in India must pay corporate tax based on the corporate income tax rate and their annual turnover. The corporate tax rate for domestic companies is 22%, and that for new domestic manufacturing companies is 15%. Certain conditions must be met to choose the concessional regime. Taxable business income of corporations is calculated in two ways, normal provision, and presumptive taxation.
In normal provision, taxable income is calculated by deducting the cost of sales and expenses from the total sales. In presumptive taxation, the taxable income is a fixed percentage of the company’s total sales. Presumptive taxation is available for businesses with a turnover of more than 2 crore rupees. Starting from the financial year 2023-24, the threshold limit under Section 44AD has been raised to 3 crore rupees, and under Section 44ADA, it has been increased to 75 lakhs. From this year on, if a non-resident opts to be taxed in a particular year, they will not be permitted to set off any unabsorbed depreciation or carry forward losses in subsequent years.
As per Section 115BAA, domestic companies can opt to pay tax at a rate of 22% plus a surcharge of 10% and a cess of 4%. The effective tax rate comes up to 25.17%, provided the companies meet certain conditions. The conditions are that such companies must not avail any exemptions or incentives under different provisions; they must exercise the option to be taxed under this section on or before the due date of filing the tax in the particular year; and the option can be exercised by submitting Form 10 IC online under the digital signature or electronic verification code of the authorized signatory of the company.
There is no restriction on turnover, and any company can migrate to this tax regime at any time. They are not required to pay the minimum alternate tax (MAT) under Section 115JB. They are not allowed to claim set off of depreciation brought forward loss due to additional depreciation or utilize their MAT credits against regular tax. The companies withdraw from the concessional tax rate scheme after they have opted for it.
Individuals with income from business or profession can opt out of the new tax regime and opt for the old regime, which will apply for all future years. They must file Form 10 IEA on or before filing their ITR. Switching back to the new regime is allowed only once in a lifetime. After switching back, they cannot opt for the old regime for future years.
Conclusion
The old regime is favorable for taxpayers who have already invested in tax saving investments and insurance schemes, while the new regime is better suited to new employees with fewer investments. It is better to calculate the tax payable under both schemes and decide which is best suited before opting for either the old or new regime. The taxpayers must also consider their individual financial goals, risk tolerance before choosing suitable investment avenues. They must adopt a balanced approach to tax planning to arrive at the optimal tax applicable to them. The income tax authorities have provided the flexibility to choose the regime. Taxpayers also have the option to switch tax regimes while filing their returns. Proper planning will mitigate the stress and confusion when the due dates are near. It is always better to seek professional help to avoid complications and stay compliant.
Frequently asked questions
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Can I switch tax regimes every year?
Answer: Salaried individuals can switch tax regimes every financial year while filing the returns.
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What is the tax benefit of the new regime?
Answer: In the old regime, income up to Rs.5/- lakhs is not taxable, which is a rebate of Rs.12500/-while in the new regime, the rebate limit is Rs.25000/-for income less than or equal to Rs. 7 lakhs.
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What is the difference between the old and new income tax regimes?
Answer: The old tax regime promotes savings and investment, helps in fulfilling long term financial goals, offers security for the future, encourages higher education, better housing, etc., as per experts, whereas the new regime promotes consumerism as people have more disposable income as there are no savings or investments. But it simplifies the tax structure to bring more taxpayers into the fold.
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How do you decide between old and new tax regimes?
Answers: To determine which tax regime is best suited for you, consider factors like annual income, investment goals, family status, and risk tolerance. The old income tax regime benefits people who have a high income above Rs. 15 lakhs, and have invested in tax savings instruments, medical insurance, home loans, and education loans. On the other hand, the new tax regime benefits people with an income less than Rs. 15 lakhs and who have or plan to have minimal investments, they enjoy lower tax rates. Therefore, to choose between the two regimes, a comparative analysis must be done, as the factors affecting the calculation of tax vary from person to person.
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How do I save taxes under the new regime?
Answer: The new tax regime does not allow many deduction benefits, but there are strategies that taxpayers can adopt to save tax, like utilizing their employer’s NPS contributions, standard deduction, and claiming the deductions allowed in the new regime like interest on home loans, transport allowances to persons with disabilities, conveyance allowances, leave encashments, and gratuities.
