INTRODUCTION:
The new tax regime for individuals and Hindu undivided families, or HUFs, brought via Section 115BAC of the Income Tax Act was aimed at bringing in a lower rate and a simpler tax system from 1 April 2020. Taxpayers could choose between the new and the old regime. Opting for the new regime meant taxpayers would be charged slightly lower tax rates but would have to forgo most deductions and exemptions available to them under the old regime.
The budget 2020 introduces a new regime u/s 115BAC giving individuals and HUF taxpayers an option to pay income tax at lower rate. The new system is applicable for income earned from 1 April 2020 (FY-2020-21) which relates to AY 2021-22.
In Budget 2023, the income tax slabs under the new tax regime have been recalibrated. The new tax slabs under the new tax regime for FY 2023-24 (AY 2024-25) are as follows:
| Post-Budget new tax regime slab rates | Pre-budget new tax regime slab rates | ||
| Income up to Rs 3 lakh | Nil | Up to Rs.2.5 lakh | Nil |
| Income from Rs 3 lakh to Rs 6 lakh | 5% | Income from Rs 2.5 lakh to Rs 5 lakh | 5% |
| Income from Rs 6 lakh to Rs 9 lakh | 10% | Income from Rs 5 lakh to Rs 7.5 lakh | 10% |
| Income from Rs 9 lakh to Rs 12 lakh | 15% | Income from Rs 7.5 lakh to Rs 10 lakh | 15% |
| Income from Rs 12 lakh to Rs 15 lakh | 20% | Income from Rs 10 lakh to Rs 12.5 lakh | 20% |
| Income above Rs 15 lakh | 30% | Income from Rs 12.5 lakh to Rs 15 lakh | 25% |
| Income above Rs 15 lakh | 30% | ||
*Cess will be levied at rate of 4% on income tax amount. Surcharges will be levied on incomes above Rs 50 lakh.
The new tax regime was announced for individuals who were unable to claim the benefits of the deductions and tax exemptions available. It also helps to ease the compliance burden for the salaried taxpayers. Currently, the new tax regime offers 6 tax slabs and lower tax rates as compared with the old income tax regime.
CAN I CHOOSE BETWEEN THE NEW TAX REGIME AND THE EXISTING REGIME?
According to the income tax laws, a salaried person can opt for the new tax regime as per their convenience in every financial year. In case an individual has a business income, they cannot choose the tax regime as per their convenience every year. If they opt for the new tax regime, they can switch back to the old tax regime only once in their life.
A salaried taxpayer can choose the new tax regime at the beginning of the FY23-24 and intimate their employer. The employee cannot change their choice anytime during the financial year. In case an employee does not choose the new tax regime at the beginning of the FY, the employer will deduct tax under existing tax regime. A salaried taxpayer can choose the new tax regime in one year and choose the regular tax regime in another year. So, he can shift to other regime whenever he seems necessary.
A non-salaried taxpayer has to choose the new regime when filing the tax return and however such non-salaried taxpayer cannot opt-in and opt-out of the new tax regime every year. So, he can shift from new to old or old to new regime, only once, and after shifting he cannot come back to existing regime again. This option of shifting was not available under earlier budgets.
EXEMPTIONS AND DEDUCTIONS NOT CLAIMABLE UNDER THE NEW TAX REGIME:-
The following are some of the major deductions and exemptions you cannot claim under the new tax system:
> The standard deduction under Section 80TTA/80TTB, professional tax and entertainment allowance on Salaries;
> Leave Travel allowance (LTA)
> House Rent allowance (HRA)
> Helper Allowance
> Children education allowance.
> Other special allowances[Section 10(14)]
> Interest on housing loan on the self-occupied property or vacant property (Section 24)
> Chapter VI-A deduction(Section 80C, 80D, 80E and so on, except Section 80CCD(2) and Section 80JJAA)
> Exemption or deduction for any other perquisites or allowances
> Deduction u/s 32(1)(iia),10(17),10AA,24(b),35,35AD,57(iia)
WHAT ARE THE EXEMPTIONS AND DEDUCTIONS AVAILABLE UNDER THE NEW REGIME?
You can claim tax exemption for:
> Transport allowances in case of a specially-abled person
> Conveyance allowance received to meet the conveyance expenditure incurred as part of the employment.
> Any compensation received to meet the cost of travel on tour or transfer.
> Daily allowance received to meet the ordinary regular charges or expenditure you incur on account of absence from his regular place of duty.
> Deduction for employer’s contribution to NPS account(Section 80CCD(2)).
> Deduction for additional employee cost (Section 80JJAA).
BUDGET UPDATES:
> The new tax regime will be the default tax regime. However, taxpayers can opt for the old regime.
> The tax exemption limit of Rs.2.5 lakh has increased to Rs.3 lakh under the new tax regime.
> A tax rebate on income of Rs.7 lakhs has been introduced under the new tax regime. Therefore, you do not have to pay tax if your taxable income is below Rs.7 lakhs under the new tax regime.
> For salaried persons, new system of standard deduction for taxable income exceeding 15.5 lakhs is Rs.52,500.
> The highest surcharge rate on income above 5 crores is reduced from 37% to 25%, which will reduce the maximum marginal rate of tax from 42.74% to 39% of income.
SALARIED PERSON-WHAT TO CHOOSE, NEW OR OLD REGIME?
A salaried person opting to pay tax under new regime cannot claim the following deductions/exemptions:
- House rent allowance u/s 10(13A)
- Leave travel allowance u/s 10(5)
- Entertainment allowance
- Professional tax
- Allowances u/s 10(14)
- Deductions under chapter VI-A (80C, 80CCD, 80CCC, 80DD, 80DDB, 80E, 80EE, 80EEA, 80G, 80IA, 80TTA, 80TTB).
EXAMPLE: 1
| Particulars | Old tax regime | New tax regime |
| Income from salaries | 20,00,000 | 20,00,000 |
| Less: HRA exemption | -1,50,000 | – |
| Less: Leave encashment | -1,00,000 | – |
| Less: Deduction u/s(16ia) | -50,000 | -52,500 |
| Gross total income | 17,00,000 | 19,47,500 |
| Less: Deduction u/s 80C | -1,50,000 | – |
| LESS: Deduction u/s 80D | -25,000 | – |
| Taxable income | 15,25,000 | 19,47,500 |
| Tax liability | 2,80,800 | 2,95,620 |
Explanation: It can be seen that the tax liability is less under old tax regime due to the fact that many deductions are available.
Conclusion: Therefore, when deductions are available to the assessee, it is beneficial to choose the old tax regime.
Example:2
| Particulars | Old tax regime | New tax regime |
| Income from salaries | 15,00,000 | 15,00,000 |
| Less: HRA exemption | – | – |
| Less: Leave encashment | – | – |
| Less: deduction u/s(16ia) | -50,000 | – |
| Gross total income | 14,50,000 | 15,00,000 |
| Less: Deduction u/s 80C | – | – |
| LESS: Deduction u/s 80D | – | – |
| Taxable income | 14,50,000 | 15,00,000 |
| Tax liability | 2,57,400 | 1,56,000 |
Explanation: It can be seen that the tax liability is less under new tax regime due to the fact that no deductions are available.
Conclusion: Therefore when deductions are not available to the assessee, it is beneficial to choose the new tax regime.
NON-SALARIED PERSON – WHICH REGIME TO CHOOSE? (REFER NOTE BELOW)
Example:1
| Old tax regime | New tax regime | |
| PGBP | 2,50,000 | 2,60,000 * |
| Income from capital gains | 10,00,000 | 10,00,000 |
| Income from other sources | 4,50,000 | 4,50,000 |
| Gross total income | 17,00,000 | 17,10,000 |
| Less: Deduction under chapter VI-A | -3,00,000 | – |
| Taxable income | 14,00,000 | 17,10,000 |
| Tax liability | 2,41,800 | 2,21,520 |
*In PGBP, additional depreciation u/s 32(1)(iia) of Rs.10,000 is not allowed under new tax regime. Hence the income is higher.
Conclusion: Therefore it is advised to choose new tax regime since the tax liability is lower.
Example:2
| Old tax regime | New tax regime | |
| PGBP | 2,50,000 | 2,60,000 * |
| Income from capital gains | 10,00,000 | 10,00,000 |
| Income from other sources | 4,50,000 | 4,50,000 |
| Gross total income | 17,00,000 | 17,10,000 |
| Less: Deduction under chapter VI-A | -4,00,000 | – |
| Taxable income | 13,00,000 | 17,10,000 |
| Tax liability | 2,10,600 | 2,21,520 |
*In PGBP, additional depreciation u/s 32(1)(iia) of Rs.10,000 is not allowed under new tax regime. Hence the income is higher.
Conclusion: Therefore it is advised to choose old tax regime since the tax liability is lower.
NOTE: If the deductions claimable by assessee is upto Rs.3,75,000 , it is beneficial for the assessee to choose new tax regime , because the tax liability is lower. However if the deductions claimable by assessee is more than Rs.3,75,000 , it is beneficial for the assessee to choose old tax regime , because the tax liability is lower.
EFFECT OF NEW SLABS VS. OLD SLABS OF 115BAC:
EXAMPLE: Computation of tax liability
Assuming that the total income is Rs.40,00,000
| Old slabs u/s 115BAC | New slabs u/s 115BAC |
| 0-2,50,000 Nil | 0-3,00,000 Nil |
| 2,50,000-5,00,000 @5% 12,500 | 3,00,000-6,00,000 @5% 15,000 |
| 5,00,000-7,50,000 @10% 25,000 | 6,00,000-9,00,000 @10% 30,000 |
| 7,50,000-10,00,000 @15% 37,500 | 9,00,000-12,00,000 @15% 45,000 |
| 10,00,000-12,50,000 @ 20% 50,000 | 12,00,000-15,00,000 @20% 60,000 |
| 12,50,000-15,00,000 @25% 62,500 | >15,00,000 @30% 7,50,000 |
| >15,00,000 @30% 7,50,000 | |
| Gross tax payable 9,37,500 | Gross tax payable 9,00,000 |
| Add: H & E cess@4% 37,500 | Add: H & E cess@4% 36,000 |
| Tax payable 9,75,000 | Tax payable 9,36,000 |
Savings: The new regime brings down the tax liability by Rs.39,000
Every person’s income will be different from each other, so it is not possible to estimate which regime to follow. Such individual must calculate the tax liability under both regimes and choose which is beneficial to him.
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The writers are the Article students at B.Narsing Rao & Co., Chartered Accountants, Hyderabad, they can be reached at their mobile numbers: ABHIRAM-8790357625 | SUNIL-6281941762 | RAVI TEJA-9949629881
Individuals having income (other than income from business & profession), can change their option of being taxed under the old tax regime or the new tax regime every year. This option must be exercised when filing the income tax return and can be changed every year, provided the income tax return is filed within the due date.
Leave encashment i suppose is exempt income and it is not a deduction. Exemption should not be available in both the regime ?
Elaborately explained
What are benefits, exemptions, deductions etc available to senior citizens/super senior citizen
having only interest income under new regime.
The standard deduction of Rs. 50,000 is proposed to be allowed for all salaried employees and pensioners in the new tax regime. The effect of this change will amount to a reduction in tax of Rs. 52,500 (comparing the earlier new regime and revised new regime) for a salaried employee earning Rs. 15.5 lakhs. This was an example quoted by the Finance Minister in her budget speech and not the condition.
I am physically disabled person. Please clarify that under new tax regime I would get relief u/s 80U or not.