Did you know that all the income tax concessions announced by the FM in recent budgets were applicable only to the new tax regime? In the 2020 budget, the FM announced her intention of flagging off a new system of income tax, where the slabs would be liberal and rates would be low, but taxpayers will not be granted too many exemptions. This was called the new tax regime. With effect from April 1 2024, all taxpayers are automatically assumed to be choosing the new tax regime. If you want to stay with the old one, you will need to opt for it before filing your return for the year.  

Lower rates  

The main difference between the old and new tax regimes in terms of the tax rates. Income of upto  ₹ 3 lakh a year enjoys zero tax under the new regime, while the limit is  ₹ 2.5 lakh under the old regime. Income of upto  ₹ 7 lakh is tax-free because you get a tax rebate under the new regime. Under the old regime, the rebate applies only upto  ₹ 5 lakh.  The rate of tax you pay for income upto  ₹15 lakh a year is also lower under the new tax regime compared to the old one.   For folks earning more than ₹5 crore a year, the old tax regime imposes a surcharge of 37 per cent on top of the income tax they pay at 30 per cent. In the new regime this surcharge in capped at 25 per cent.  

Fewer exemptions  

In return for enjoying lower tax rates under the new regime, the government expects you to give up a bunch of tax breaks. Under the old tax regime, you get to deduct a bunch of allowances from your employer and expenses from your income for the calculation of tax.  On allowances, the old tax regime allows you to deduct Leave Travel Allowance (LTA) and House Rent Allowance (HRA). Under the new regime you can’t claim these deductions.  

On investments, the old tax regime again offers a host of exemptions which aren’t available under the new regime. Section 80C of the IT Act says that if you contribute to post office schemes, EPF or NPS or invest upto  ₹1.5 lakh a year in life insurance premiums, pension, ELSS schemes that is kept out of your income for tax purposes. Section 80C doesn’t apply to the new regime. The additional  ₹50,000 that you can contribute to NPS under section 80CCD(1) and (1B) is also exempted under the old regime but not under the new one.  

If you have bought a home with a loan or plan to do so, again the old tax regime would be far better for you. Under the old regime, both the principal repayment and interest payments of upto  ₹ 2 lakh a year for a self-occupied home are allowed as deductions from income to calculate tax. The new regime does not allow either.  Deduction towards health insurance premiums, treatment of certain illnesses, maintenance of disabled family members etc enjoy exemptions under the old regime but not under the new one.  

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How do you choose between the old and new tax regimes?

Now that you know what you stand to gain or lose under the new tax regime, should you stay with it?  No one can give a blanket recommendation on this and your decision will depend on your income and savings habits.    Usually, the new tax regime will prove better than the old one if you have the following attributes: 

Income Tax Calculator

- You learn less than or equal to  ₹ 7 lakh a year 

- You can’t invest  ₹ 1.5 lakh in 80C instruments or  ₹ 50,000 in NPS every year 

- You don’t have a home loan on which you are claiming interest exemptions 

- You don’t have a large outgo towards health insurance or medical treatments  

If in doubt, use this calculator offered by the IT department to find out which regime minimises your tax outgo.  

https://incometaxindia.gov.in/Pages/tools/115bac-tax-calculator-finance-act-2023.aspx 

(Host: Aarati Krishnan, Producer & Edits: Anjana PV, Camera: Bijoy Ghosh and Amitha Rajkumar)

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