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The union budget 2023 stirred many sighs, smiles, and questions. With universalization and digitalization as its two primary promising propellers, it has set numerous grounds for growth, inclusivity, and diversification of financial growth. Financial literacy across all walks of life and sections of society is our way forward toward making informed decisions. In the pacy and ever-so-evolving day age we live in, cognizant decision-making, and emotional discernment is as crucial as financial decision-making. We cannot miss out on understanding which of the two regimes, old and new, to choose to post the release of budget 2023 while we reflect on financial literacy as our competitive edge.
The two factors that will help us navigate and harbor the most lucrative regime for your income are as follows:
1) Income bracket
2) Eligible deductions
The new tax system has eliminated several commonly used deductions such as LTA, HRA, conveyance allowance, children’s education allowance, standard salary deduction, professional tax deduction, interest on housing loans, and various deductions under Chapter VI-A (excluding Section 80CCD(2)). However, it does offer some deductions such as a transport allowance for people with disabilities, work-related travel conveyance allowance, investment in a recognized pension scheme under Section 80CCD (2), a deduction for hiring new employees under Section 80JJAA, depreciation under Section 32 of the Income-tax act (excluding additional depreciation), and an allowance for work or transfer travel.
You have tax planners to land on the best deductions that fall under your salary structure, corresponding to ITR and tax planning.
1) Annual income of 9,00,000:
You must determine your eligibility for various deductions if you want to reduce your tax burden by a larger amount, which is only achievable under the previous tax system. You would have saved in taxes when comparing the old and new tax systems upon claiming deductions over and beyond Rs. 2.13 lakhs. You can pay no tax at all if you deduct a total of Rs 4 lakh.
Let us understand it better with an example,
In addition to the standard deduction of 50,000, the old tax code offers the opportunity for further deductions, including 1,50,000 under Section 80C, 50,000 under Section 80CCD(1B) for NPS, 50,000 for health insurance premiums (25,000 for the taxpayer and 25,000 for their parents) under Section 80D, and an additional 1,00,000 under Section 24(B) for home loan interest. This, combined with the standard deduction of 50,000, reduces the taxable income to 500,000, with a resulting tax liability of 12,500. If the taxpayer takes advantage of the 12,500 Section 87A rebate, their tax obligation would be zero.
2) Annual income is Rs 10.5 lakh:
Under the new tax system, if your yearly income is Rs 10.5 lakh, you will owe Rs 60,000 in income tax. The only option to avoid paying this tax is to choose the previous tax system and maximize your deductions to enable them to reach Rs 2,62,500. You will ultimately pay the same amount of tax in this scenario as you would have under the previous tax system.
3) Annual income of 12 lakhs:
Compared to the current tax system, an individual can potentially save more on taxes by claiming deductions exceeding 3 lakh rupees. If the total deductions claimed amount to 7 lakh rupees, they may not have to pay any taxes.
The new tax system inspires interest due to its notably lowered tax rates. Nonetheless, we must examine various deductions available under the old tax regime when making a decision. One must thoroughly analyze the deductions that can get obtained through loans, expenses, and other components of their income to make an informed choice.
