Mr. Amar Deo Singh, Head Advisory, Angel One Ltd.
The income tax slabs and deductions in the Union Budget are often followed with curiosity and excitement by most employed individuals around the country. An individual’s tax planning depends heavily on the concessions and deductions offered by the government through regulations of the Income Tax Act 1961. With the FM’s announcement of making the new tax regime the default option from AY 2024-25, taxpayers must be well-acquainted with the salient features of the new regulations.
Changes in Basic Exemption Limits and Surcharges
Under the new regime, the basic tax exemption limit has exceeded Rs. 2.5 lakhs to Rs. 3 lakhs. In addition, a tax rebate has been introduced for income up to Rs. 7 lakhs (annually). The standard deduction of Rs. 50000 has also been extended in the new regime.
The highest surcharge rate of 37% has been reduced to 25%, which impacts taxpayers having an income of more than Rs. 5 crores. The implication is that the effective tax rate shall decrease to 39% from 42.74%.
Exemptions and deductions disallowed under the New Regime
However, a few tax planning tools that have been conventionally used to reduce tax liability under the old regime are no longer included in the new regulations. These tools include standard deduction under Section 80TTA/80TTB, Leave Travel Concession, House Rent Allowance, Children’s Education Allowance, Special Allowances under section 10(14) of the Act, and most importantly, Chapter VI-A deduction (Section 80C, 80D, 80E and so on, except Section 80CCD (2) and Section 80JJAA).
In addition, interest on housing loans on the self-occupied or vacant property (Section 24) and any deductions on facilities and perquisites have been discontinued under the new regime.
Additional Exemptions and Deductions Available
A few additional exemptions and deductions were introduced under the new regime, which were not available in the older regulations. It includes transport allowance for specially-abled individuals, conveyance allowance, compensation on the cost of travel during transfer or tours, employer’s contribution to NPS account (Section 80CCD(2)), additional employee cost (Section 80JJA), and standard deduction (of Rs. 50000 discussed before).
Furthermore, the budget also introduced deductions under Section 57(iia) as expenses towards family pension income. The new regime also has made arrangements for deductions under Agniveer Corpus Fund under Section 80CCH(2).
Comparison between the two regimes
The two regimes differ, depending on the tax planning tools a taxpayer uses to choose between the two alternatives. It is critical to consider the total taxable income and whether the taxpayer has deductions under Section 80C, 80D, HRA exemptions/housing loan, where one would prefer the older regime. On the other hand, if the taxpayer does not have such investments and still wishes to reduce the tax liability, the new tax regime can be chosen as the maximum amount not chargeable to tax is higher than the old regime.
By choosing the new tax regime, the individual would find investments in traditional insurance policies or pension plans less attractive as the tax benefits would no longer be available. On the other hand, it would be possible to be self-reliant in terms of using savings and making investment decisions on one’s end.
A taxpayer must consider the expected income, investments, housing loans, and other deductions at the start of the financial year. Based on the assessments, either of the two regimes can be chosen. The new tax regime works well for individuals who do not want to invest money in low-yielding options such as life insurance and pension schemes. Taxpayers who manage their investments well through the stock market or other alternative investments can still reduce their total tax liability by choosing the new tax regime.