Benefits granted
- Increased exemption limit from Rs. 2,50,000 to 3,00,000
- Increased rebate from Rs. 12,500 to Rs. 25,000 (where income does not exceed Rs. 7,00,000)
- Reduction of the maximum marginal rate from 42.74% to 39.00%
- Relief in tax rates by increasing the tax slabs as under:
New Income Tax Slabs 2023-24
Benefits forgone
However, taxpayers opting for new tax regime are required to forego various deductions and exemptions available under the old tax regime. Some deductions/ exemptions majorly claimed under old tax regime are as under:
- Leave travel concession
- House rent allowance
- Standard deduction (where income does not exceed Rs. 15,50,000)
- Interest on loan for house property up to Rs. 2,00,000
- Deduction in respect of life insurance premium, provident fund, public provident fund, equity linked saving scheme up to Rs. 1,50,000
- Contribution to NPS up to Rs. 50,000
- Mediclaim premium up to Rs. 25,000/ 75,000
- Deduction in respect of rent paid up to Rs. 5,000 per month
- Donation to charitable trusts
- Contribution to political parties
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But is it really lucrative to opt for the new tax regime? We have analysed various situations to understand the implications/ breakeven point for opting for new tax regime.
Assumptions:
- Calculation is done for a non-senior citizen resident taxpayer.
- Taxpayer has salary income only.
Is the new income tax regime beneficial?
As evident from the table above, a middle-class taxpayer claiming deduction/exemption exceeding Rs. 3,75,000 may not benefit by opting for the new tax regime.
Standard deduction
The Budget proposed the extension of standard deduction to taxpayers opting for new tax regime where income exceeds Rs. 15,50,000. However, this is not evident from the fine print in the Finance Bill, 2023, which may be rectified once the said Bill becomes an Act.
Default regime
It is evident from the Budget speech that the government is actively promoting the new tax regime, making it the default tax regime. Currently, the taxpayer is required to file an online application/ declaration to opt for new tax regime. From AY 2024-25 and onwards, if a taxpayer wants to opt for the old tax regime, he/ she will be required to file an application/ declaration and that too, on or before the due date to file the Income-tax return. If not, the taxpayer may not be able to opt for old tax regime.
Further, in case of a businessman/ professional, such option once exercised, shall apply to subsequent assessment years as well. In case of others, one can opt-in and out on a year-on-year basis.
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Beneficial regime
Under the old tax regime, taxpayers can avail benefits/ deductions/ exemptions, by investing in specified tax saving investments. On the other hand, taxpayers can benefit from the reduced tax rates under the new tax regime, but they are unable to take advantage of the majority of deductions and exemptions. It seems that the new tax regime demotes the taxpayer to save/ invest in tax saving instruments, thereby making taxpayers spend more instead of making investments. This may result in a situation where a taxpayer may not have enough corpus at the time of retirement.
Therefore, from a tax perspective, one needs to calculate the tax liability under both the regimes and take a call. However, one must not forget to plan to secure his post retirement savings as well.
(Yogesh Shah is Partner, Deloitte India; Aparna Parelkar, Deloitte Haskins and Sells LLP and Darshin Haji, Deloitte Haskins and Sells LLP. Views are personal)
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