The recently announced Budget 2024 has brought significant changes to the income tax regime, raising pertinent questions about which tax structure—old or new—will be more advantageous for different categories of taxpayers.
Finance Minister Nirmala Sitharaman's revisions include adjustments to tax slabs and deductions, aimed at providing relief to various segments of taxpayers. Let's delve into the details to understand which regime might be more beneficial based on individual circumstances.
New income tax regime: Highlights and considerations
Under the new income tax regime effective from April 1, 2024, the basic exemption limit remains at ₹3 lakh, meaning income up to this amount is not subject to tax. The revised tax slabs are structured as follows:
- Income from ₹3 lakh to ₹7 lakh: Taxed at 5%
- Income from ₹7 lakh to ₹10 lakh: Taxed at 10%
- Income from ₹10 lakh to ₹12 lakh: Taxed at 15%
- Income from ₹12 lakh to ₹15 lakh: Taxed at 20%
- Income above ₹15 lakh: Taxed at 30%
The Finance Minister tweaked slab rates slightly for the new tax regime, however, keeping the highest slab at 15 lakhs like before. Moreover, the standard deduction for the new tax regime was increased to ₹75,000 from ₹50,000 earlier. However, there is no change in the old tax regime, whatsoever, further signalling that the Government might be looking to phase out the old tax regime in near future.
The question now becomes which tax regime might be better for you as an individual taxpayer. That depends on the deductions you are claiming. Are you claiming full HRA? Are you investing the full amount under section 80C? Do you have an education loan? Do you have a home loan? Are you paying for medical insurance?
If the answer to all or most of the above is Yes, then for most of the higher income levels, the old tax regime may continue to be better for you. However, if none of the above deductions are applicable to you, then you may consider getting into, or continuing, a new tax regime, according to Vaibhav Jain, Head of Business.
Meanwhile, Lohit Bhatia, President of the Indian Staffing Federation, points out that the new regime, despite lower exemptions, offers substantial benefits to young professionals and those entering the job market. For instance, individuals earning around ₹7.5 lakh per annum could see zero taxes under this regime, making it particularly attractive for lower income brackets.
Old income tax regime: Applicability and advantages
Contrary to the new regime, the old income tax structure continues to allow for various deductions under sections such as HRA, 80C investments, medical insurance premiums, education loan interest, and charitable donations. Chintak Shah, Vice President at Anand Rathi Wealth Limited, emphasises that for individuals availing substantial deductions—exceeding ₹4.3 lakh—the old regime may still offer greater tax savings.
For example, deductions under section 80C alone can amount to ₹1.5 lakh annually, significantly reducing taxable income. Moreover, deductions for HRA (House Rent Allowance) and medical insurance can further lower the tax liability, making the old regime preferable for those with considerable investment in such avenues.
Choosing between the regimes: Factors to consider
The decision between opting for the old or new tax regime depends largely on individual financial circumstances and the extent of deductions one can claim:
- Deductions and Investments: If you are currently availing deductions such as HRA, 80C investments, or have significant medical or education expenses, sticking with the old regime might result in lower taxes.
- Simplicity vs. Savings: The new regime offers simplicity with fewer deductions but might be more beneficial for those who do not utilise the full extent of available deductions under the old regime.
- Income Level: Higher income earners, especially those crossing the ₹15 lakh threshold, might find the revised tax slabs under the new regime less advantageous due to higher tax rates compared to the old regime.
- Long-term Planning: Consider future financial goals and potential changes in income levels that could affect tax liability under both regimes.
The transition to a simplified tax regime offers reduced complexity and potentially lower taxes for some, particularly those with moderate incomes and fewer deductions. However, the old regime continues to benefit individuals with substantial tax-saving investments and expenses. Consulting a financial advisor is recommended to make an informed decision based on individual financial circumstances and goals.