The message from Budget 2024 was loud and clear: say goodbye to the old income tax regime. Union finance minister Nirmala Sitharaman proposed three key changes in the new tax regime, while the old one was left untouched.
She tweaked the slab rates. Income up to ₹3 lakh will attract no tax, while it will be 5% for ₹3 lakh-7 lakh, 10% for ₹7 lakh-10 lakh, 15% for ₹10 lakh-12 lakh, 20% for ₹12 lakh-15 lakh and 30% for ₹15 lakh and above.
Standard deduction for salaried employees was increased to ₹75,000 from ₹50,000 earlier.
The limit on an employer’s contribution to an employee’s National Pension System account, which attracts tax deduction for employees in the new tax regime, has been increased to 14% of the basic salary from 10% earlier.
Considering all these changes, the total tax savings in the new regime will amount to a maximum of ₹17,500.
Does this mean everyone should move to the deduction- and exemption-free simplified regime? Not necessarily. We compared both regimes for different income groups to deduce which one works for whom.
First things first. If your annual income is up to ₹7 lakh, choose the new regime because the tax rebate of ₹25,000 under Section 87A makes your tax liability zero. For the salaried class, the threshold is higher at ₹7.75 lakh, thanks to the standard deduction of ₹75,000, which is not available to the self-employed.
Those with income above the nil-tax threshold need to calculate the total amount of deductions and exemptions they can claim in the old tax regime. We computed the break-even amount for each income level (see GFX). If your deductions and exemptions exceed the break-even amount, go for the old tax regime, otherwise the new tax regime will be better.
For annual income of ₹10 lakh, the break-even limit is ₹3.5 lakh, assuming tax deduction of ₹4 lakh against investments, donations and insurance premium. Since the deductions are higher than the break-even limit, the old regime will make sense.
If your annual income is ₹15 lakh and you can claim deductions of more than ₹4.58 lakh, you should go for the old regime. The highest break-even point comes in at ₹4.83 lakh and is applicable for income levels ranging from ₹15.75 lakh to ₹5 crore.
“People with an annual income of more than ₹5 crore need not make this comparison. They should always go for the new tax regime, thanks to a lower surcharge rate of 25% applicable in the new tax regime against 37% in the old tax regime,” said Anurag Jain, co-founder and partner at ByTheBook LLP Consulting.
Chartered accountant Naveen Wadhwa calculated the breakeven point by the income threshold and the typical deductions taken. To be sure, people generally opt for deductions adding up to ₹4 lakh – ₹1.5 lakh under Section 80C, ₹50,000 under Section 80D ( ₹25,000 for self and another ₹25,000 for parents) and ₹2 lakh for interest on housing loan under Section 24 (b).
“If your annual income is more than ₹14.75 lakh, the new tax regime will be better against ₹4 lakh deduction, while those earning below ₹14.75 lakh should go for the old tax regime. This income threshold comes in at ₹7.75 lakh if you opt for deductions only under Section 80C and 80D,” said Wadhwa, vice president of Taxmann.
To be sure, about 70% of the taxpayers opted for the new tax regime so far in FY24.
“The proposed changes will provide the necessary impetus for individuals to stick with the new tax regime rather than revert to the old tax regime. It is welcoming as it will bring forth the much-needed change in the mindset that investments must be made keeping personal goals in mind rather than looking at it from a tax-planning angle. The simplified regime will also curtail fraud and litigation,” said Jain.