Unlocking Tax Efficiency: Exploring Enhanced Benefits of New Tax Regime 3.0
As Budget 2024 was unveiled, the question on most individual taxpayers’ minds was “What measures will the Government undertake to benefit middle-class citizens?” This is due to the fact that salaried individual taxpayers are perceived as getting a raw deal due to inflation that reduces the effective increase in salaries and a regime that offers no deductions for expenses other than a standard deduction.
The expectations were addressed to a certain extent by way of the following announcements in relation to the third version of the new tax regime viz. (new tax regime 3.0) for personal income-tax:
- Simplified slab rates
- Enhanced standard deduction from Rs. 50,000 to Rs. 75,000
- Enhanced deduction in respect of family pension from Rs. 15,000 to Rs. 25,000
- Higher deduction of 14% instead of 10% of the employee’s salary for contribution to the National Pension Scheme (‘NPS’)
To provide a brief background, Budget, 2020 had introduced an optional new tax regime via section 115BAC, as an alternative to the old tax regime. The regime appeared to be prompted by the millennial generation’s penchant to spend rather than save and offered significantly reduced income-tax rates to individual taxpayers who chose to forgo specific deductions and exemptions. Despite the same, the new tax regime did not find favor with majority taxpayers living in rented accommodations, having investments in tax-advantaged retirement savings instruments or home-loans to repay.
With a view to overcome the poor response and make the new tax regime more attractive, Budget 2023 brought in key changes comprising inter-alia improved rebate, modified tax slabs, reduced surcharge and extension of standard deduction. A notable development however was that the new tax regime was made to apply as the default tax system for taxpayers not expressing preference at the commencement of the fiscal year. Notwithstanding the same, taxpayers (other than those having business income) are permitted to switch to the old tax regime by indicating their choice of tax regime in their income-tax return.
Coming to the Budget 2024 proposals, a comparison of the existing slabs under the new tax regime vis-à-vis the proposed ones is as under:
| Present | Proposed | ||
| Total income | Rate of Tax | Total Income | Rate of Tax |
| Up to Rs. 3,00,000 | Nil | Up to Rs. 3,00,000 | Nil |
| From Rs. 3,00,001 to Rs. 6,00,000 | 5% | From Rs. 3,00,001 to Rs. 7,00,000 | 5% |
| From Rs. 6,00,001 to Rs. 9,00,000 | 10% | From Rs. 7,00,001 to Rs. 10,00,000 | 10% |
| From Rs. 9,00,001 to Rs. 12,00,000 | 15% | From Rs. 10,00,001 to Rs. 12,00,000 | 15% |
| From Rs. 12,00,001 to Rs. 15,00,000 | 20% | From Rs. 12,00,001 to Rs. 15,00,000 | 20% |
| Above Rs. 15,00,000 | 30% | Above Rs. 15,00,000 | 30% |
The tax payable pursuant to the above change is as illustrated below:
| Particulars | Present
Amount (Rs.) |
Proposed
Amount (Rs.) |
| Salary | 15,00,000 | 15,00,000 |
| Standard deduction | (50,000) | (75,000) |
| Gross Total Income | 14,50,000 | 14,25,000 |
| Total taxable income | 14,50,000 | 14,25,000 |
| (Tax + cess) | 1,45,600 | 1,30,000 |
As may be observed, an individual with a net taxable salary of less than Rs. 15,00,000 would achieve a tax-saving of Rs. 15,600 due to the change in the tax rate structure under the new tax regime 3.0.
Furthermore, the increased deductions for family pension and NPS would also contribute to lower tax for taxpayers having pension income and NPS-investment.
Old tax regime vs. New tax regime 3.0: Which offers greater benefits?
The choice of which regime is more advantageous hinges on the extent of deductions, exemptions, and allowances available under the old tax regime. To facilitate selection, a break-even analysis as provided below would help.
Particulars |
Income – Rs. 700000 |
Income – Rs. 1000000 |
Income – Rs. 1475000 |
Income – Rs. 2000000 |
||||
Old |
New |
Old |
New |
Old |
New |
Old |
New |
|
Salary |
700000 |
700000 |
1000000 |
1000000 |
1475000 |
1475000 |
2000000 |
2000000 |
Std. deduction |
(50000) |
(75000) |
(50000) |
(75000) |
(50000) |
(75000) |
(50000) |
(75000) |
Net Salary |
650000 |
625000 |
950000 |
925000 |
1425000 |
1400000 |
1950000 |
1925000 |
LTA/ HRA claim etc. |
– |
– |
(100000) |
– |
(200000) |
– |
(283000) |
– |
Gross Total Income |
650000 |
625000 |
850000 |
925000 |
1225000 |
1400000 |
1667000 |
1925000 |
Deductions: |
||||||||
80C |
(150000) |
– |
(150000) |
– |
(150000) |
– |
(150000) |
– |
80D |
– |
(50000) |
– |
(50000) |
– |
(50000) |
– |
|
Total taxable income |
500000 |
625000 |
1050000 |
925000 |
1425000 |
1400000 |
1867000 |
1925000 |
Tax |
12500 |
16250 |
42500 |
42500 |
120000 |
120000 |
252500 |
252500 |
EC |
– |
1700 |
1700 |
4800 |
4800 |
10100 |
10100 |
|
Rebate u/s 87A |
(12500) |
(16250) |
||||||
Total tax |
– |
– |
44200 |
44200 |
124800 |
124800 |
262600 |
262600 |
Section 87A offers a maximum tax rebate of Rs. 25,000 on taxable income not exceeding Rs. 7,00,000 under the new regime, as opposed to a maximum tax rebate of Rs.12,500 on taxable income not exceeding Rs.5,00,000 under the old tax regime. Thus, in case of taxpayers with annual taxable income of less than or equal to Rs. 7,00,000 and further not availing of any deductions/ exemptions, the new tax regime 3.0 shall emerge as the preferred option.
However, if the taxpayer avails various deductions/ exemptions, then it is pertinent to note the following position based on the illustration above:
| Income of Rs. | When will the old tax regime be beneficial? | When will the new tax regime 3.0 be beneficial?
|
| If the available exemptions/ deductions (other than standard deduction) | ||
| 7,00,000 | = or > Rs. 1,50,000 | < 1,50,000 |
| 10,00,000 | > Rs. 3,00,000 | = or < Rs. 3,00,000 |
| 14,75,000 | > Rs. 4,00,000 | = or < Rs. 4,00,000 |
| 20,00,000 | > Rs. 4,83,000 | = or < Rs. 4,83,000 |
Conclusion:
The old tax regime could be a better pick in case if the taxpayer has the requisite quantum of the deductions/ exemptions available other than the standard deduction.
Since the sources and quantum of income, as also the eligible deductions and exemptions would vary from taxpayer to taxpayer, a one-size-fits-all approach may not be feasible. Taxpayers should evaluate and compare their tax liabilities under both regimes carefully to make an informed choice and effectively plan their long-term financial goals.
****
(The Article is Co-authored by Mallika Apte (Associate Director) and Prachi Shah (Manager) from Deloitte Haskins & Sells LLP)
your information for Rs ten lakh salary after deductions of 80C and D of two lakh if deducted from 850,000 will be Rs 650000 only and not 1050000. Hence wrong