It is that time of the year. Or is it? The start of the new Financial Year when the provisions of the year’s Budget are implemented. On 1st February 2023, our Budget Day, the Finance Minister (FM) Ms. Nirmala Sitharaman had announced a slew of changes to the tax structure that will impact each one of us. Most of us have listened to the FM’s budget speech, read through some articles (actually WhatsApp posts & twitter threads 😛), seen a few videos too. There have been deep discussions about the changes in tax slabs & the regimes around coffee machines.
However, within a few days the excitement has died down. People are back to their usual lives. But it is this very time when all taxpayers must be aware about the change in the tax regimes. They need to choose a regime. A spoiler! Once you choose the new regime this year, you cannot go back to the old regime next year.
However, very few of us have read the detailed budget documents to understand the nitty gritties of these regimes. Well, we have done that for you. New or old? If you are wondering which regime to choose and whether or not to avail deductions? Which one suits you. What are the implications of each regime for your tax liability?
We have all of this & more covered in this article.
Firstly, some:
Background
In the Budget of 2020, the FM introduced a new tax regime for the budget. This regime consisted of a new set of tax slabs with reduced interest rates. However, the major difference over the old tax regime was the absence of a majority of deductions. Deductions are expenses towards certain financial instruments that allow to reduce the tax liability. Compared to the old tax regime the new tax regime had fewer tax deductions which was beneficial for people who never invested to avail these deductions. The popular deductions for PPF, ELSS mutual funds, Life & health Insurance policies as well as home loan interests were waived a good bye in the new tax regime. So, here is a comparison of tax rates in both the regimes before the Budget of 2023 i.e. for FY 2022-23.
Source: https://www.maxlifeinsurance.com/
Changes for FY2023-24
The Budget of 2023 is more focused on the new tax regime. So, If we talk about the old tax regime, no new changes have been made. The tax slabs & the taxation rates along with the deductions & their limits have been kept the same. Whereas, in the new tax regime, the slab rates have been simplified from 7 to 6. Here are the old tax slabs and new tax slabs:
Here are a few more changes in the new tax regime in Budget 2023:
- Rebate under Section 87A increased from income threshold of 5 Lakh, to 7 Lakh.
- Increase in standard deduction from Rs. 50000 to Rs, 52500 if income is above 15.5 Lakh. (Refer Case-2 Under New Tax Regime, Table -1)
- Reduction in surcharge for incomes above Rs. 5 Crores
As announced by the FM, the New Tax Regime will henceforth be the default option, but you can still opt for the old tax regime i.e. the one with the maximum deductions. However, once you avail the new tax regime, you will not be able to go back to the old regime in the future. Does that mean there are no deductions in the new tax regime? No! There are a few as listed below:
Deductions that can you avail the new tax regime
- Transport allowance for specially-abled.
- Conveyance allowance for expenditure incurred for travelling to work.
- Investment in notified Pension scheme under section 80 CCD (2) –
This is money deposited by employer e.g., in NPS (National Pension Scheme). Individual contribution is not deductible. - Allowance for travelling for employment (business trips, visits) or transfer (from one location to other.
So, who should choose the new tax regime & who shouldn’t?
Your answer in the table below.
Before you move to the values in the table here’s a brief explainer and disclaimer:
- The table is a comparison between the Old & the New Tax Regime. The standard deduction in the new tax regime is variable for salaries below & above Rs. 15.5 Lakhs.
- For old tax regime, 4 scenarios are considered:-Case-1: No deductions.-Case-2: 80C (i.e. PPF, ULIP, ELSS etc.) & NPS up to their full limits & Mediclaim for self & parents up to their full limit-Case-3: Mediclaim (health insurance premium) for self & parents and home loan (Principal & Interest). The home loan principal up to Rs. 1.5 Lakh is claimable as part of 80C benefits.-Case-4: The last scenario under the old regime is the same as the earlier one apart from the NPS. The maximum allowable deduction under 80C is Rs. 1.5 Lakhs. So, it can come entirely from home loan principal or PPF, ELSS, ULIP investments or a combination of these. But addition of NPS to these, results in a higher tax savings.
- We have not taken the HRA (House Rent Allowance) deduction which is allowed in the old tax regime. HRA is dependent on the HRA & basic component of salary & the actual rent paid. There are no fixed rules defining the percentage of HRA or the basic component w.r.t the entire salary. Neither are the housing rents uniform. They vary as per demand supply, locality, size & amenities in the house. Considering the major deductions of 80C, NPS & Home Loan interest, the deduction of HRA is minimal.
- The tax liability calculated in the table below, doesn’t include any cess/surcharges. These will be over and above the amount displayed in the table.
Key Highlights:
- For our young reader, who is starting their new job with income up to Rs. 5 Lakhs, then irrespective of the tax regime your tax liability will be zero.
- If income is up to Rs. 7 Lakhs, then your tax liability will be zero only in the new tax regime. However, if you avail deductions under 80C, NPS & home loan interest then, the tax liability can become zero even in the old regime. (Case-4 under Old Tax Regime)
- Above an income of Rs. 7 Lakhs, the new tax regime is slightly more tax efficient over the old tax regime, in spite of availing deductions for 80 C instruments, NPS & Mediclaim. For higher income levels, say above 15 Lakhs, the tax savings in the new regime are significant.
- However, if we combine 80C, NPS & Mediclaim deductions with that of the deduction for home loan interest then the old tax regime is always more beneficial than the new one. So, folks, if you have a home loan & investments it’s better to opt for the old tax regime.
- For our young friends, who plan to take out a home loan in the coming year or two, it’s prudent to continue with the old tax regime, since reversing back to old from the new regime is not possible.
- For people who never invest in any of the tax saving instruments, choose the new tax regime, because even claiming deduction for home loan principal & interest will result in a higher tax liability in the old regime.
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