Five Budget measures are designed to narrow the gap in the tax outgo between old and new tax regimes, in a bid to attract individual taxpayers to embrace the latter. For taxpayers willing to adopt the new regime, the Budget has offered a rebate on ₹7 lakh of annual income instead of ₹5 lakh, widened the middle tax slabs, extended the standard deduction benefit and cut the highest surcharge rate. Those in the old tax regime will enjoy none of these benefits. The Budget has also made the new income regime the default one for filers but citizens will continue to have the option to stay in the old tax regime.
The latest income tax moves could be a precursor to an eventual single tax regime in a few years. But calculations based on different levels of income show that for many lower and middle-income taxpayers, the old tax regime still results in a lower tax outgo, if they use up all the tax-advantaged savings avenues.
Income levels matter
Currently, those with income up to Rs 5 lakh do not pay any income tax in both old and new tax regimes. The Budget has proposed to increase the rebate limit to Rs 7 lakh in the new tax regime. Thus, persons in the new tax regime, with income up to Rs 7 lakh will not have to pay any tax. But in contrast, in the old tax regime after considering HRA exemption, standard deduction, professional tax and some use of section 80C, Section 80CCD(1B) and Section 80D, the tax outgo is Rs 22,901. Without the Budget sop of higher rebate limit, you would have paid Rs 33,800 under the new tax regime. By extending the benefit of standard deduction to the new tax regime, it has been sweetened.
But for those with gross income of ₹10 lakh, ₹20 lakh and ₹35 lakh, opting for old tax regime still means lower tax outgo compared to the new regime. But the Budget reduces the gap between the old and new regimes. Those earning ₹10 lakh gross income will pay ₹54,600 as tax as per the proposed concessional tax regime, compared to ₹31,221 under the old tax regime. But this is lower than the ₹78,000 tax they would have to pay had it not been for the latest sops. For those earning Rs 20 lakh, the gap between proposed concessional tax regime and old tax regime is just about ₹6,000 compared to Rs 60,000 earlier. For those earning ₹35 lakh, the effective tax rate under proposed concessional regime is 21.8 per cent compared to 20.8 per cent.
But as your income levels soar to Rs 55 lakh and beyond, your tax outgo under the new regime works out lower than the old regime. This is mainly because of the surcharge on the highest income slab being lowered. The highest tax rate in our country at 42.74 per cent is among the highest in the world. The Finance Minister has proposed to reduce the highest surcharge rate from 37 per cent to 25 per cent in the new tax regime. This would result in reduction of the maximum tax rate to 39 per cent.
While the above calculations are premised on investors using up their section 80C, HRA, 80CCD, and medical insurance concessions under the old tax regime, not all taxpayers would be using this entire battery of breaks. How many taxpayers are able to fully use relevant sections by investing ₹1.5 lakh under Section 80C, another ₹50,000 by investing in NPS, ₹25,000 for medical insurance premiums, 50,000 for medical insurance premiums for parents aged over 60, etc., needs to be evaluated.
Hence, taxpayers should be pragmatic and see which system works better by personalising the tax calculations instead of getting enthusiastic over scenarios that are computed based on the maximum possible deductions.
Tweaks in favour
The new personal income tax regime was introduced in 2020 with six income slabs starting from ₹2.5 lakh. The Budget has proposed to change the tax structure in this regime by reducing the number of slabs to five and increasing the tax exemption limit to ₹3 lakh. The new tax rates are nil for ₹0-3 lakh, 5 per cent for ₹3-6 lakh, 10 per cent for ₹6-9 lakh, 15 per cent for ₹9-12 lakh, 20 per cent for ₹12-15 lakh and 30 per cent for above ₹15 lakh.