Finance Minister Nirmala Sitharaman, in the Union Budget 2023-24, has proposed several changes to the personal income tax system with an aim to benefit taxpayers. The income tax rebate limit has been increased from Rs 5 to Rs 7 lakh, the tax slabs have undergone restructuring, and the new tax regime has been made the default system for everyone.
So far, the income tax rebate limit, allowed under Section 87A of the Income Tax Act, for both the old and new tax regimes, was Rs 5 lakh. This meant that those with annual income up to Rs 5 lakh were not required to pay any tax. The old tax regime had a higher tax rate but provided exemptions. The new tax regime, meanwhile, had a lower tax rate but one could not claim any exemptions. Now, the tax-free ceiling has been increased to Rs 7 lakh but only for those who choose the new tax regime.
The tax slabs in the new tax regime have also been revised. The no-tax slab has been increased by Rs 50,000. Now, income between Rs 0 to Rs 3 lakh will not be taxed. Earlier, the basic tax exemption limit under both regimes was Rs 2.5 lakh. In addition, the number of slabs in the new tag regime has been brought down to five.
According to Finance Minister Nirmala Sitharaman, “The personal income tax has had substantial changes (in the Budget) which will benefit the middle class. The new taxation regime has now got greater traction and incentive so that people can now unhesitatingly move to the new regime from old”.
With the new tax regime made default, taxpayers, in the new financial year, will have to specify if they want to opt for the old tax regime. Otherwise, the income tax will be calculated as per the proposed new tax regime for everyone.
Since the Budget 2023 announcement, many taxpayers have been trying to analyze which tax regime will give them greater benefits. For now, taxpayers can choose between the old tax regime and the existing new tax regime. The proposed new tax regime will be applicable to the income earned in the new financial year.
Below we have tried to explain if you should switch to the new tax regime or stick to the old one to make more savings.
It must be noted that in the below cases, all individuals in the new tax regime have claimed Rs 50,000 Standard Deduction, Rs 1.5 lakh deductions under Section 80C of the Income Tax Act, Rs 50,000 deduction for investment in the National Pension Scheme (NPS) under Section 80CCD (1B), and tax exemption of Rs 75,000 on HRA and home loan. Here, the total deductions and exemptions availed come out to be Rs 3,25,000.
On the other hand, there are no deductions or exemptions available in the existing new tax regime so the actual income is equal to the taxable income in every scenario. In the proposed new tax regime, a standard deduction of Rs 50,000 has been allowed.
Income of Rs 8 lakh (Old Tax Regime)
If a salaried person earns an annual income of Rs 8 lakh then his taxable income after claiming all deductions and exemptions is Rs 4,75,000 as per the old tax regime. As this is below the Rs 5 lakh rebate limit, the person doesn't need to pay any tax here.
Income of Rs 8 lakh (Existing New Tax Regime)
For a person with an annual income of Rs 8 lakh and who has chosen the existing new tax regime, his taxable remains the same as his actual income. As this exceeds the Rs 5 lakh rebate limit, the person will have to pay an income tax of Rs 46,800. This implies that such taxpayers will have to pay Rs 46,800 more income tax in the existing new regime as compared to the older one.
Income of Rs 10 lakh (Old Tax Regime)
If a taxpayer with an annual income of Rs 10 lakh claims all deductions and exemptions available in the old tax regime, his taxable income becomes Rs 6,75,000. The tax payable on this will be Rs 49,400, which includes education cess.
Income of Rs 10 lakh (Existing New Tax Regime)
In the existing new tax regime, a taxpayer with annual income of Rs 10 lakh will have to pay Rs 78,000 as tax on a taxable income of Rs 10 lakh. This means that by switching to the new tax regime, you will have to pay Rs 28,600 more in income tax.
Income of Rs 15 lakh (Old Tax Regime)
The taxable income for a person with an annual income of Rs 15 lakh comes out to be Rs 11,75,000 in the old tax regime. After taxation under applicable tax slabs, the person will have to pay Rs 1,71,600 as income tax.
Income of Rs 15 lakh (Existing New Tax Regime)
For a salaried employee with Rs 15 lakh annual income, he will have to pay Rs 1,95,000 income tax on a taxable income of Rs 15 lakh. Comparing this to the old regime, you will be paying Rs 23,400 more income tax here.
Income of Rs 20 lakh (Old Tax regime)
For an annual income of Rs 20 lakh, the tax is calculated on Rs 16,75,000 after the deductions and exemptions are claimed in the old tax regime. The payable tax here comes out to be Rs 3,27,600.
Income of Rs 20 lakh (Existing New Tax Regime)
In the existing new tax regime, a person with annual salary of Rs 20 lakh will be paying Rs 3,51,000 income tax on Rs 20 lakh taxable income. Here too, adopting the new tax regime will cost you Rs 23,400 more in income tax.
Income of Rs 25 lakh (Old Tax Regime)
In the old tax regime, a person with a salary of Rs 25 lakh per annum will pay Rs 4,83,600 income tax. The taxable income here is Rs 21,75,000, which is subject to tax under different tax slabs.
Income of Rs 25 lakh (Existing New Tax Regime)
As per the existing new tax regime, a person with annual salary of Rs 25 lakh will be paying Rs 5,07,000 income tax. This is again Rs 23,400 more than what the same person would have paid in the old tax regime.