The Budget 2023 stirred confusion among taxpayers about choosing between the old and new tax regimes. In a bid to promote the new regime, the government introduced several incentives, signaling a gradual shift towards the new system while maintaining the existence of the old regime.

Updates from the Interim Budget 2024-2025:

No alterations were made to direct taxes in the Interim Budget 2024-2025.

New Tax Regime:

The new tax regime, introduced in Budget 2020, revamped tax slabs and offered lower tax rates. However, opting for this regime means forfeiting several exemptions and deductions, including HRA, LTA, and sections 80C and 80D. To boost adoption, Budget 2023 implemented five key changes, maintaining consistency into FY 2024-2025:

Higher Tax Rebate Limit: Tax rebate extended to income up to ₹7 lakhs, up from ₹5 lakhs under the old regime.

Streamlined Tax Slabs:  Tax exemption limit raised to ₹3 lakhs, with revised slabs offering progressive rates.

Standard Deduction and Family Pension Deduction:  Standard deduction of ₹50,000 and family pension deduction extended.

Reduced Surcharge for High Net Worth Individuals:  Surcharge rate lowered on income exceeding ₹5 crores.

Higher Leave Encashment Exemption:  Exemption limit for non-government employees raised from ₹3 lakhs to ₹25 lakhs.

Old Tax Regime:

The old regime predates the new, offering over 70 exemptions and deductions, including popular ones like HRA and LTA, along with Section 80C.

Which Is Better: Old or New?

The decision hinges on individual tax-saving deductions and exemptions available in the old regime. We’ve calculated breakeven points for various income levels to simplify the decision-making process:

– For instance, for a salary of ₹7 lakhs, the new regime is beneficial.

– Conversely, for a salary of ₹10 lakhs, the old regime prevails if deductions exceed ₹2,62,500.

Advantages of the Old Tax Regime:

1. Abundance of Deductions and Exemptions: The old regime offers a plethora of deductions and exemptions under various sections of the Income Tax Act, such as HRA, LTA, and Section 80C. This allows taxpayers to significantly reduce their taxable income and consequently, their tax liability.

2. Tailored to Different Financial Profiles:  With its wide array of tax-saving instruments, the old regime caters to the diverse needs of taxpayers, including salaried employees, self-employed individuals, and senior citizens. This customization ensures that taxpayers can optimize their tax-saving strategies based on their specific financial circumstances.

3. Encourages Long-term Savings: By incentivizing investments in instruments like Provident Fund (PF), Public Provident Fund (PPF), and Life Insurance Premiums (LIC), the old regime promotes a culture of long-term financial planning and savings. Taxpayers are encouraged to channel their funds into avenues that offer both tax benefits and financial security.

Disadvantages of the Old Tax Regime:

1. Complexity and Compliance Burden:  The multitude of deductions and exemptions under the old regime adds complexity to tax calculations and increases the compliance burden for taxpayers. Navigating through various provisions and ensuring compliance with eligibility criteria can be daunting and time-consuming.

2. Limited Scope for Simplification:  Despite its benefits, the old regime lacks the simplicity and ease of administration offered by the new regime. The intricate web of deductions and exemptions complicates tax administration and makes it challenging for taxpayers to understand and leverage the full spectrum of tax-saving opportunities.

Advantages of the New Tax Regime:

1. Simplified Tax Structure:  The new tax regime introduces a simplified tax structure with reduced tax rates and fewer deductions and exemptions. This streamlines the tax-filing process, making it more straightforward and less cumbersome for taxpayers, especially those with relatively simple financial affairs.

2. Lower Tax Rates:  With lower tax rates compared to the old regime, the new regime offers immediate tax relief to taxpayers, resulting in lower tax outflows and increased disposable income. This can stimulate consumption and investment, thereby fostering economic growth and development.

3. Promotes Financial Inclusion:  By eliminating the need for complex tax planning and incentivizing compliance through lower tax rates, the new regime promotes financial inclusion and encourages individuals to enter the formal tax system. This contributes to broader tax base and enhanced revenue collection for the government.

Disadvantages of the New Tax Regime:

1. Reduced Tax-saving Opportunities:  Opting for the new regime means forgoing many deductions and exemptions available under the old regime, such as HRA, LTA, and Section 80C. This limits the scope for tax-saving opportunities and may result in higher tax liabilities for certain taxpayers, particularly those who heavily rely on these exemptions.

2. Limited Flexibility:  Unlike the old regime, which allows taxpayers to tailor their tax-saving strategies based on individual needs and preferences, the new regime offers limited flexibility in terms of tax planning. Taxpayers have fewer options to optimize their tax liabilities and may feel constrained by the lack of customization.

Conclusion:

Both regimes have their merits and demerits, catering to different financial profiles. While the old regime encourages saving habits and offers a plethora of tax-saving avenues, the new regime appeals to those seeking simplicity and lower tax rates. Ultimately, the choice boils down to individual circumstances and preferences.

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Frequently Asked Questions:

1. What is the old tax regime?

   – The old tax regime is the existing structure allowing various deductions and exemptions under the Income Tax Act, offering higher tax rates but tax benefits on investments and expenses.

2. Can I switch between the old and new tax regime?

   – Yes, taxpayers can switch annually while filing tax returns, considering the deductions and exemptions available in each regime.

3. Which tax regime is better for a 30 lakhs salary?

   – The new regime is beneficial if deductions are less than ₹3,75,000; otherwise, the old regime is preferable.

4. What deductions are allowed in the new tax regime?

   – Selective deductions like standard deduction, employer’s NPS contribution, and deductions on family pension income are allowed under the new regime.

5. Is HRA exemption available in the new tax regime?

   – No, HRA exemption and many other commonly claimed exemptions are not available in the new tax regime.