Make the right choice in tax regime

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Employees have started getting mails from their HR departments to choose the income tax regime to deduct tax. Employees can choose the old or the new tax regime. The old tax regime has a provision for lot of deductions and the new one  has none, barring the standard deduction. We will tell you nine things related to the new tax regime. It will help you to make the right decision.

1)  Lower Tax Rates

Taxpayers can benefit from lower tax rates under the new regime. It will reduce their tax liability and leave more money in hand. The government is focused on making the new tax regime more attractive.

2) Simpler Tax Structure

The new tax regime simplifies the tax structure as the tax payer is offered lower tax rates. Under the new tax regime, there is zero tax on income of up to Rs 3 lakh, 5% on income between Rs 3,00,001  to Rs 6 lakh, 10% tax on income between Rs 6,00,001 to Rs 9 lakh,15% tax on income between ₹9,00,001 to ₹12 lakh and 20% on income between Rs 12,00,001 to ₹15 lakh. Income above Rs 15 lakh will be taxed at 30%.

3) Basic Exemption Limit

In the new tax system, the basic exemption limit, which is the income tax threshold, is Rs 3 lakh. Whereas, in the old tax regime, this limit is Rs 2.5 lakh for people under 60 years of age. Suppose your income is Rs 9 lakh, then there will be no tax on income up to ₹3 lakh in the new tax regime. Tax will be applicable at the income slab rate on income above ₹3 to ₹9 lakh. A higher exemption limit makes the new tax regime attractive.

4) Income Tax Rates

In the new tax system, the highest tax rate, 30%, applies to income above Rs 15 lakh. Meanwhile, in the old tax regime, a 30% tax rate applies to net income above Rs 10 lakh. Suppose your income is Rs 18 lakh, then in the new regime, 30% tax applies from Rs 15 to 18 lakh, whereas in the old regime, tax 30% would be payable on income from Rs 10 to 18 lakh.

The new regime also has tax rates of 10%, 15%, and 25%, while in the old regime, after 5%, the rate directly jumps to 20% and then to 30%.

5) Change in Rebate Limit

In the Budget 2023, the rebate limit under the new tax regime has been increased. In the old tax regime, under Section 87A, the rebate limit for income up to Rs 5 lakh is Rs 12,500. Thus, under the old tax system, no tax is applicable on income up to Rs 5 lakh. However, under the new regime, if the taxable income is up to Rs 7 lakh or lower, the rebate limit is Rs 25,000. This means that if your taxable income is Rs 7 lakh or lower, no tax will be levied under the new regime.

6) Benefit of Standard Deduction

In both the old and new tax regimes, there is a standard deduction of Rs 50,000 for salaried individuals. Previously, this deduction was only available under the old tax regime. In the Budget 2023, the standard deduction was made a part of the new tax regime as well.

7) Reduction in Deductions and Exemption

In the old tax regime, there are around 70 deductions and exemptions. These  help in  tax reduction. The new tax system has very limited deductions. Consequently, taxpayers neither need to invest in tax-saving instruments nor have to deal with the hassle of submission of related documents.

8) NPS Investment and Leave Encashment Exemption

In the Budget 2023, under the new tax regime, the limit for the exemption on leave encashment for non-government employees, was, increased from Rs 3 lakh to Rs 25 lakh. Hence, leave encashment up to Rs 25 lakh is tax-free. The taxpayer gets the encashment after retirement.

Similarly, if an employer, contributes to the National Pension System or (NPS) on employee’s behalf, then, the employee can claim a deduction under Section 80CCD (2). Under this, government employees can claim a deduction equivalent to fourteen percent of basic salary plus DA, while, other employees can claim a deduction of only ten percent.

9) Change in Surcharge Rate

From April 1, 2023, under the new tax system, the high income surcharge has been reduced from 37% to 25%. These rates apply to individuals earning more than Rs 5 crore. This means that those whose income exceeds Rs 5 crore, and, who opt for the new tax regime will have to pay a lower surcharge.

Including standard deduction, if your income is up to Rs 7 lakh or if you do not want to make any kind of investment to save taxes, then, you can choose the new tax regime. But if you benefit from a home loan, education loan, NPS investment, or HRA, then use the income tax calculator. Calculate your tax liability in both tax regimes.

Choose the regime in which you would benefit the most.