New Tax Regime Pro’s & Con’s W.E.F 01/04/2023 Onwards

1. What is the difference between Old Tax Regime and New Tax Regime under Income tax Act, 1961?

The Old Tax Regime and New Tax Regime refer to two different sets of tax rules that individuals in India can choose from to calculate their income tax liability under the Income Tax Act, 1961.

Old Tax Regime: This is the traditional tax system under which taxpayers can claim various deductions and exemptions to reduce their taxable income. These deductions include deductions under Section 80C for investments in instruments such as Public Provident Fund, National Savings Certificate, and Equity Linked Saving Scheme, among others. Taxpayers can also claim deductions for medical insurance premiums, education loan interest payments, and donations to charitable organizations, among others.

New Tax Regime: The new tax system, introduced in the Union Budget 2020, offers a lower tax rate but does not allow for most deductions and exemptions available under the old tax system. Taxpayers who opt for the new tax regime are not allowed to claim deductions under Section 80C, 80D, 80E, and so on. However, they can claim a standard deduction of Rs. 50,000 for income from salary. Taxpayers who opt for this regime cannot switch back to the old tax regime once they have made the choice.

Under the New Tax Regime under Income Tax India 1961, taxpayers are not allowed to claim the following deductions and exemptions:

1. Standard deduction under Section 16(ia) for salaried individuals: The new tax regime offers a standard deduction of Rs. 50,000 for salaried individuals, but no other deductions are allowed under this section.

2. Deduction under Section 80C: The most popular tax-saving investments, such as Public Provident Fund, National Savings Certificate, Equity-Linked Savings Scheme, etc., which come under this section, are not allowed under the new tax regime.

3. Deduction under Section 80D: This deduction allows individuals to claim deductions for medical insurance premiums paid for self, spouse, children, and parents, which is not allowed under the new tax regime.

4. Deduction under Section 80E: This deduction allows individuals to claim deductions for the interest paid on education loans. However, this deduction is not allowed under the new tax regime.

5. Deduction under Section 80G: This deduction allows individuals to claim deductions for donations made to certain charitable organizations. This deduction is not allowed under the new tax regime.

Under the New Tax Regime under Income Tax Act 1961, the following allowances and exemptions are not allowed in Salary Income:

1. House Rent Allowance (HRA): HRA is an allowance paid by an employer to an employee to cover the cost of rented accommodation. Under the old tax regime, taxpayers can claim a deduction for HRA received, but this deduction is not allowed under the new tax regime.

2. Leave Travel Allowance (LTA): LTA is an allowance provided by an employer to an employee to cover the expenses incurred during travel within India. Under the old tax regime, LTA received can be claimed as an exemption, but this exemption is not available in the new tax regime.

3. Standard Deduction: Under the new tax regime, taxpayers can claim a standard deduction of Rs. 50,000 for salary. However, no other deductions are allowed under this section.

4. Entertainment Allowance: Entertainment allowance is an allowance paid by an employer to an employee for the purpose of entertainment. Under the old tax regime, taxpayers can claim a deduction for entertainment allowance received, but this deduction is not allowed under the new tax regime.

5. Professional Tax: Professional tax is a tax levied by state governments on individuals who earn a salary or practice a profession. Under the old tax regime, taxpayers can claim a deduction for professional tax paid, but this deduction is not allowed under the new tax regime.

It is important to note that taxpayers who opt for the new tax regime are not allowed to switch back to the old tax regime once they have made the choice. It is important to note that taxpayers must evaluate the pros and cons of both tax regimes before making a decision to choose the one that best suits their financial situation.

In summary, the main difference between the Old Tax Regime and New Tax Regime is that the former allows for various deductions and exemptions while the latter offers a lower tax rate but with fewer deductions and exemptions. It is important to note that taxpayers must carefully evaluate both options before making a decision to choose the one that best suits their financial situation.