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A couple of years ago, the government introduced a new tax regime. It was the first time in history, that Indian taxpayers have two distinct tax regimes. The new tax regime had discounted tax rates for the same slabs, but it does not offers numerous exemptions just like old tax regime. old tax regime was the default taxation system, but last year, the union government brought a few constructive changes to the new tax regime. It is declared as default tax regime, increased the tax slabs, introduced a few exemptions, and imposed lower tax rates than the old tax regime. This government act has again raised the question in the minds of taxpayers, old or the new? Which tax regime you should opt for in 2024?

The updated tax rates for both tax regimes in 2023

Not just the lower tax rates, the new tax regime also offers lower surcharges for income above 5 Crore. This can help to reduce the burden of high taxation from additional surcharge liabilities.

This surcharge is calculated as a percentage of actual tax paid by the individual, HUF, association, body of individuals, and artificial judicial person. E.g. a person having an income of 5300000/- has a tax liability of 12,75,000/-. A surcharge of 10% of the tax liability applies to him/her, which will be added to the existing liability. Which will be 1275000 + 127500(10% of 1275000) = 1402500/-

Old tax regime: –

For the last several years, income tax rules have seen many changes. With the economic boom, increasing disposable income, and changing spending patterns of taxpayers, the government has updated income tax rules time and again. After all these changes, the current tax slab starts from the income of 2.5 lacs and it goes up incrementally.

The old tax regime has numerous tax rebates. These rebates help taxpayers to reduce their taxable income. In turn, it helps to motivate taxpayers to invest in multiple tax savings instruments. These investments help taxpayers not just for tax savings but also provide capital appreciation and build a large corpus over a period.

A few of these exemptions under the old tax regime are mentioned below.

Standard deduction: – A standard deduction of 50,000/- is offered under section 16 of the Income Tax Act to all taxpayers. This rebate under the Income Tax Act is common for both regimes.

Section 80C: – Section 80C is the most popular and most utilized tax rebate option of the Income Tax Act. This is because of the wide range of saving instruments covered under this section. A few other sections are also part of this section. These sections are, 80CCC, and 80CCD (1), It covers many saving instruments, a few of which are mentioned below.

• Life insurance premiums
• Contribution to the Public Provident Fund (PPF)
• Investment in ELSS Mutual fund
• Investment in national saving certificate
• Contribution to the Sukanya Samruddhi scheme
• Contribution to the Senior Citizen Saving Scheme
• Principle amount paid towards housing loan
• Stamp duty and registration charges paid towards buying residential property
• Contribution to the APY, or National Pension Scheme (80CCD1)
• Contribution by the employer towards National Pension Scheme (80CCD2)
• Tax saving Fixed Deposit

Maximum tax rebate: – 1,50,000/-

Section 80CCD (1B): – This section provides an additional tax rebate over existing investment in 80C. This section can be used to get an additional tax rebate of 50,000/- over and above 1,50,000/- provided under section 80C. This section is relevant to those who invest in the National Pension Scheme or APY. If an individual has exhausted a tax rebate of 80C, they can use this section to take a rebate against investment in NPS.

Maximum tax rebate: – 50,000/-

Section 80 D: – Section 80 D is a tax rebate that can give the claimant a maximum rebate of up to 50,000/- to 1,00,000/-. This encompasses premiums paid toward health insurance. It encourages taxpayers to buy health insurance for themselves, family, and parents. The tax rebate is divided into two options, i.e. self, spouse, children, and pair of parents or parents-in-law.

• Self, spouse, & children: – up to health insurance premium of 25,000/-
• Pair of Parents or parents-in-law: – up to health insurance premium of 25,000/- & if they are senior citizens, it can be claimed up to 50,000/- for individuals more than the 80s, getting health insurance is unlikely, so expenses towards health treatment can also be considered up to 50000/-
• If the total health insurance premium is less than the eligible limit, then an additional expense of 5000/- towards preventive health check-ups can be claimed within the eligible limit.

Maximum tax rebate: – 50,000/- (If parents are not senior citizens)

Maximum tax rebate: – 75,000/- (If parents are senior citizens)

Section 80 E: – this section gives tax rebates under interest paid for education loans. This can be claimed for a spouse, children, or a student’s legal guardian. This section covers all the education loans either for studies in India or abroad taken from any scheduled bank. It promotes the need for higher studies by incentivizing rebates for loans.

Maximum tax rebate: – No limit, it can be claimed for 8 years.

Section 24(B): – This section provides rebates to housing loan takers. All those taxpayers who took home loans and serving EMIs can claim rebates against the interest amount paid in the taxable year. This section is different from section 80EE and section 80EEA. The amount of the rebate varies for self-occupied and let-out property.

Maximum tax rebate: – 200,000/- for self-occupied and no limit for let-out property, where the rental income will be added to the taxable income portion.

Section 80 EE: – Section 80EE provides an additional rebate against interest paid against a housing loan. This is for housing loans where the value of the housing property is above 45 lacs. This rebate is over and above 2,00,000/- provided for interest paid for the housing loan under section 24. It is eligible only with certain predefined conditions.

Maximum tax rebate: – 50,000/-

Section 80 EEA: – Section 80EEA is like section 80EE, but you can opt for any one of the two. It provides interest payment rebate for housing loans below 45,000/-. Like in 80EE, this rebate is over and above 2,00,000/- provided for interest paid for the housing loan under section 24. Eligibility to claim this comes with certain conditions.

Maximum tax rebate: – 1,50,000/-

A taxpayer can only claim a rebate under either section 80EE or section 80EEA provided they are fulfilling the stipulated conditions for the respective sections.

Section 80G: – This section covers the donations made by the taxpayers. Governments have set up multiple relief funds, and this section motivates taxpayers to donate some funds and get the benefit of the tax rebate. Rebate under this section varies depending on the funds. Rebate can be 100% or 50% of the donated amount.

Maximum Rebate: – it varies as per the receiver of the donation.

Section 80GG: – Those taxpayers who do not get HRA as a salary component and reside in a rented house are eligible to claim a rebate under section 80GG. Under this section, salaried and self-employed taxpayers are eligible to claim tax rebates. Taxpayers who do not have a house in the same city either in their name, spouse’s name, or minor children’s name can claim a rebate under this section. The rebate claimed should be the least of the three mentioned below.

• 25% of total income (Taxable income after deducting all the rebates except this section)
• Rent paid minus 10% of the income (Taxable income after deducting all the rebates except this section)
• 60,000/- Annually

Maximum tax rebate: -60,000/-

Section 80EEB is a new tax rebate for electric vehicles purchased on loan. It has been introduced to motivate vehicle buyers to transition from traditional fuel to renewable fuel-powered vehicles. It ensures less pollution and is cost-effective. On top of all these benefits, the government offers a tax rebate against the interest paid towards the loan for the purchase of the vehicle.

Maximum Rebate: – 1,50,000/-

Section 10(13A): – those salaried taxpayers, who get HRA as part of their salary can claim a rebate in income tax under this section. To claim a tax rebate under this section, the taxpayer must reside in a rented property. If the individual resides with their parents or family member, they can still claim the rebate under this section, provided proof of rent payment can be produced. The HRA rebate depends on various factors, it should be the least of the following three conditions

• Total HRA paid by the employer
• Actual Rent paid minus 10% of the basic component of the salary
• 50% of Basic + DA for metro or 40% of Basic + DA for non- metro.

Maximum tax rebate: – least of three mentioned above.

Section 10(14): – Under this section, an employee can claim a tax rebate of the allowance received by the employee from the employer. This allowance could be for multiple purposes, as mentioned below.

• Daily allowance: – when on tour for outstation training or other official purposes outside the station, the employee incurs expenses towards daily maintenance. It can occur when the employee is on duty but not in his regular place of duty. In case of transfers, the employee pays a daily allowance for the initial few days. Allowance towards this expense can be claimed as a rebate by the employee under this section.
• Travel Allowance: – the expenses incurred towards the travel fare for official visits must be paid by the employer. It can be claimed under this section.
• Transfer allowance: – An employee transferred to another location may receive an allowance towards the multiple expenses incurred during the transfer process. This allowance can be rebated under this section.

Maximum tax rebate: – Up to the actual incurred expense.

Section 87A: – A newly introduced section that helps lower-income taxpayers to save on income tax. It allows all taxpayers who have taxable income above 2.5 lacs and below 5 lacs to get an exemption on payment of income tax. It means if a taxpayer’s taxable income lies between 2.5 lacs and 5 lacs, they need not pay income tax to the government and get relief.

New tax regime: –

It is the latest tax regime announced by the government two years ago. This regime has a lower rate of tax compared to the old tax regime, in return, it got rid of all the tax rebates offered in the old tax regime. The new tax regime starts from up to 3 lacs with nil tax and goes above 15 lacs with the highest tax rate at 30%. It has gotten away with most of the tax rebates, though it offers a few rebates as discussed below.

Standard deduction: – Section 16 offers a standard deduction of 50,000/- from the taxable income as a tax rebate. It is offered to all the taxpayers. This rebate under the Income Tax Act is one of those few rebates common for both income tax regimes.

Maximum tax rebate: – 50,000/-

Section 87A: – Like the old tax regime, this section provides tax exemptions to those who fall in the initial taxation slabs. In the new tax regime, individuals up to 3 lacs need not pay any tax, whereas individuals with income between 3 to 6 lacs should pay 5% income tax, and above that the income tax rate is 10%. Section 87A allows individuals having taxable income up to 7 lacs to get full tax exemption.  In the new tax regime, income up to 7 lacs does not attract income tax.

Maximum tax rebate: – 25,000/- = 15000/- + 10,000/- (for 7,00,000/- taxable income)

Section 10(14): – Under this section, an employee can claim a tax rebate of the allowance received by the employee from the employer. This allowance could be for multiple purposes, as mentioned below.

• Daily allowance: – when on tour for outstation training or other official purposes outside the station, the employee incurs expenses towards daily maintenance. It can occur when the employee is on duty but not in his regular place of duty. In case of transfers, the employee pays a daily allowance for the initial few days. Allowance towards this expense can be claimed as a rebate by the employee under this section.
• Travel Allowance: – the expenses incurred towards the travel fare for official visits must be paid by the employer. It can be claimed under this section.
• Transfer allowance: – An employee transferred to another location may receive an allowance towards the multiple expenses incurred during the transfer process. This allowance can be rebated under this section.

Maximum tax rebate: – Up to the actual incurred expense.

These lower tax rates under distinct income categories help taxpayers easily understand taxation and avoid unnecessary investments for gaining tax rebates.

This was all about both the tax regimes and the rebates offered by them. To understand the suitability of the tax regime as per the various scenarios, we will consider some of the cases.

 Taxation Scenario

This case of taxation is of Aman. Aman works in one of the leading multinational companies in India. His projected income for this financial year is 12,00,000/-. What tax regime should he choose to optimize his tax position and save the maximum tax?

Old Tax Regime vs New Tax Regime Calculation

Conclusion

Both the old and new tax regimes in India offer distinct advantages and drawbacks, making the “better” option subjective and dependent on individual circumstances.

New Tax Regime:

• Benefits: Lower tax rates, higher exemption limit, simpler filing process, no need for maintaining various receipts.
• Drawbacks: Limited deductions & exemptions, might not be suitable for individuals with high investments or specific deductions in mind.

Old Tax Regime:

• Benefits: Wide range of deductions & exemptions, more flexibility in tax planning, suitable for individuals with substantial investments or specific deductions.
• Drawbacks: Higher tax rates, complex filing process, requires collecting and maintaining various documents.

Choosing the Right Option:

• Individuals with lower income and limited investments: The new regime can be beneficial due to lower tax rates and simpler filing.
• Individuals with high income and substantial investments: The old regime might offer a lower tax liability due to available deductions and exemptions.
• Individuals with moderate income and investments: Carefully compare both regimes using online calculators or consult a tax advisor to identify the most tax-efficient option.

Ultimately, the best tax regime depends on your unique financial situation, investment portfolio, and risk appetite. Consider all factors carefully before making your choice. Remember, you can switch between regimes each year based on your circumstances.

FAQs

Q1. can we change tax regime during filling of income tax return?

Ans: – a tax regime can be changed while filling tax return. This can be done only once in a financial year. if an employee has opted for new tax regime while opting initially, they can change this while income tax filling.

Q2. What do you mean by default tax regime?

Ans: – If a person has not opted for any of the tax regime, he may be considered and taxed as per the new tax regime. for opting old tax regime, tax payers needs to specifically opt for old tax regime otherwise the tax calculation will be done as per old tax regime. for those who could not file tax under the provided deadline, they would not be able to file tax in old tax regime, they will have to file tax as per the default i.e. new tax regime.

Q3. Which tax regime is better compared to other?

Ans: – suitability of tax regime varies as per individuals.  old tax regime can be suitable to those who have enough investments like life insurance, ELSS, NPS providing rebates and  housing loans, education loans, etc. New regime are suitable for those who lacks all of these investments and debt servicing.