Important Keyword: Income Tax, Income Tax Filing, New Tax Regime, Old Tax Regime.
Table of Contents
Difference Between Old vs New Tax Regime
In her Budget speech on February 1, 2020, Finance Minister Nirmala Sitharaman introduced significant reforms, including the unveiling of the New Tax Regime.
The objective behind this new regime was to simplify the tax structure and ease the compliance burden on taxpayers. The primary distinction between the two tax regimes lies in the income tax slab rates and the eligibility to claim exemptions and deductions.
Despite being two years since the introduction of the New tax regime under section 115BAC, a large portion of taxpayers continued to file their Income Tax Returns (ITR) under the old tax regime. In a bid to incentivize adoption of the new regime, the Union Budget for 2023-24 proposed revisions to the tax slabs for the new regime, among other changes.
Tax Slab Rates
Under the New Regime, revised tax slab rates were introduced, with existing rates reduced for income up to INR 15 Lakh. The tax slab rates under both the ‘New Income Tax Regime’ and the ‘Old Income Tax Regime’ are as follows:
| Income Range | Rates as per Old Regime | Rates as per New Regime (up to AY 2023-24) |
| Up to INR 2,50,000 | Nil | Nil |
| INR 2,50,001 – 5,00,000 | 5% | 5% |
| INR 5,00,001 – 7,50,000 | 20% | 10% |
| INR 7,50,001 – 10,00,000 | 20% | 15% |
| INR 10,00,001 – 12,50,000 | 30% | 20% |
| INR 12,50,001 – 15,00,000 | 30% | 25% |
| Above INR 15,00,000 | 30% | 30% |
| Income Range | Rates as per New Tax Regime (AY 2024-25 onwards) |
| Up to INR 3,00,000 | Nil |
| INR 3,00,001 – 6,00,000 | 5% |
| INR 6,00,001 – 9,00,000 | 10% |
| INR 9,00,001 – 12,00,000 | 15% |
| INR 12,00,001 – 15,00,000 | 20% |
| Above INR 15,00,000 | 30% |
Basic Exemption Limit
Under the new tax regime, the basic tax exemption limit will remain uniform for all assesses, including senior citizens. Consequently, if you choose the new regime, there will be no increased tax exemption for senior and super senior citizens.
| Age | New Regime Exemption Limit (AY 2024-25 onwards) | New Regime Exemption Limit (up to AY 2023-24) | Old Regime Exemption Limit |
| People Below 60 Years of Age | INR 3,00,000 | INR 2,50,000 | INR 2,50,000 |
| People Between 60 to 80 Years of Age | INR 3,00,000 | INR 2,50,000 | INR 3,00,000 |
| People Above 80 Years of Age | INR 3,00,000 | INR 2,50,000 | INR 5,00,000 |
Changes in Deductions and Exemptions under the New Tax Regime
The Budget 2020 introduced significant changes in tax exemptions and deductions, aiming to simplify tax compliance. Here’s a breakdown of deductions that have been retained and those that have been removed under the new tax regime:
| What is not covered in New Tax Regime | What is covered in New Tax Regime |
| Leave Travel Allowance | Income from Life Insurance |
| House rent allowance | Money received as a scholarship for education, etc. |
| Standard deduction of Rs 50,000 available for salaried individuals (up to AY 2023-24) | Leave encashment on retirement |
| Deductions available under Section 80TTA/TTB | Agricultural Income |
| Entertainment allowance deduction and professional tax ( For government employees) | Standard Deduction on Rental Income and Standard Deduction of INR 50,000 for Salaried individuals, pensioners and of INR 15,000 for family pensioners (AY 2024-25 onwards) |
| Tax relief on interest paid on home loan for self-occupied or vacant property u/s 24 | Retrenchment compensation |
| Deduction of INR 15,000 from the family pension (Up to AY 2023-24) | VRS proceeds up to INR 5 lakhs |
| Tax-saving investment deductions under Chapter VI-A (80C,80D, 80E,80CCC, 80CCD, 80DD, 80DDB,, 80EE, 80EEA, 80EEB, 80G, 80GG, 80GGA, 80GGC, 80IA, 80-IAB, 80-IAC, 80-IB, 80-IBA, etc) (Except, deduction under Section 80CCD(2), 80JJA, and 80CCH) | Death cum retirement benefit |
Changes under Income from House Property in the New Tax Regime
Changes in Deductions on Home Loan interest – Section 24(b)
Under the new income tax regime, there are specific provisions regarding the treatment of home loan interest for different types of properties:
- No claim of home loan interest on self-occupied property: Individuals who have taken a home loan for their self-occupied property and are paying interest on it cannot claim the interest deduction under Section 24(b) of the Income Tax Act.
- Claim of home loan interest on rental property: In the new regime, individuals can claim interest on home loans for properties that are let-out. However, the deduction is limited to the amount of rental income declared under the head of house property income. This means that individuals cannot claim interest expenses that exceed the rental income earned from the property.
These provisions aim to ensure that tax benefits are aligned with the usage and income generated from the property, promoting fairness and transparency in the tax system.
The setting off of losses from house property income
In the new income tax regime, there are specific rules regarding the treatment of losses from house property income:
- Setting off of losses: Losses incurred from house property can only be set off against other income from house property in the same financial year. This means that if an individual has losses from one house property, they can offset these losses against income earned from another house property within the same financial year.
- No carry forward of losses: Unlike the previous tax regime, where losses from house property could be carried forward to future years, the new regime does not allow for the carry forward of such losses. This means that any losses incurred from house property income cannot be carried forward to offset against income in future years.
These provisions aim to streamline the tax treatment of losses from house property income, ensuring that they are offset within the same financial year and not carried forward indefinitely.
Deduction for first-time Homebuyers
Under the new income tax regime, certain deductions that were previously available have been removed. One such deduction is under Section 80EE and Section 80EEA, which provided relief on interest paid on home loans for first-time home buyers. However, under the new regime, taxpayers are not eligible to claim this deduction. Therefore, individuals who have taken home loans for their first property purchase will not be able to avail of this tax benefit in the new income tax regime.
Deductions for business expenditure under New Tax Regime
In the context of business income, certain deductions and exemptions that were previously available are no longer allowed under the new income tax regime. These include:
- Additional Depreciation under Section 32: Taxpayers can no longer claim additional depreciation on certain assets under Section 32 of the Income Tax Act.
- Investment Allowance under Section 32AD: The investment allowance, which provided tax benefits for certain investments, is not permitted under the new regime.
- Sector-specific Business Deductions under Sections 33AB and 33ABA: Deductions related to specific sectors, as outlined in Sections 33AB and 33ABA, are no longer applicable in the new regime.
- Expenditure on Scientific Research under Section 35: Tax benefits associated with expenditures on scientific research, as provided by Section 35, are no longer available.
- Capital Expenditure under Section 35AD: Tax benefits on capital expenditures, as specified in Section 35AD, are not permitted in the new regime.
- Exemption under Section 10AA for SEZ Units: The exemption provided to Special Economic Zone (SEZ) units under Section 10AA is no longer applicable for business income under the new tax regime.
Setting-Off Business/Profession Loss
Under the new tax regime, individuals and Hindu Undivided Families (HUFs) with business income face certain limitations regarding the set-off and carry-forward of losses. Specifically:
- Ineligibility to Set Off Brought Forward Business Loss or Unabsorbed Depreciation: Taxpayers cannot set off any brought forward business loss or unabsorbed depreciation against their current business income.
- Inability to Carry Forward Brought Forward Business Loss or Unabsorbed Depreciation: Additionally, any business loss or unabsorbed depreciation from previous years cannot be carried forward to offset against future business income.
- Restrictions on Deductions and Exemptions: These limitations apply specifically to losses related to deductions and exemptions withdrawn under clause (i) of sub-section (2) of section 115BAC. This includes losses from sources such as house property, additional depreciation, and others.
In simpler terms, while certain losses like short-term and long-term capital losses can be carried forward, losses related to specific deductions and exemptions withdrawn under section 115BAC cannot be set off or carried forward. Examples of such losses include those from house property and additional depreciation.
Comparison of Old and New Tax Regimes
Determining whether to opt for the old or new tax regime isn’t a one-size-fits-all decision. It hinges on individual circumstances and financial standing.
While the new tax regime offers lower tax rates, the absence of certain deductions or exemptions necessitates a thorough comparison before making a decision.
Consider the following examples illustrating the tax liability under both regimes for the same salary, assuming no exemptions are claimed.
A PERSON WITH AN ANNUAL INCOME OF INR 7,50,000
Let’s calculate the tax liability for the individual aged 45 years with an income of INR 7,50,000 using both the old and new tax regimes, considering the given details:
Solution
The following table shows the tax calculation under different regimes:
| Particulars | Tax under Old Regime | Tax under New Regime (up to AY 2023-24) | Tax under New Regime (AY 2024-25 onwards) |
| Income from Salary | INR 3,50,000 | INR 3,50,000 | INR 3,50,000 |
| Less: Standard Deduction | (INR 50,000) | NA | (INR 50,000) |
| Profit from Business & Profession | INR 2,00,000 | INR 2,00,000 | INR 2,00,000 |
| Income from Other Sources | INR 2,00,000 | INR 2,00,000 | INR 2,00,000 |
| Total headwise Income | INR 7,00,000 | INR 7,50,000 | INR 7,00,000 |
| Less: Deduction under chapter VI-A | |||
| Section 80C Deduction | (INR 1,50,000) | NA | NA |
| Section 80D Deduction | (INR 20,000) | NA | NA |
| Net Taxable Income | INR 5,30,000 | INR 7,50,000 | INR 7,00,000 |
| Total Tax Liability | INR 18,500 | INR 37,500 | INR 25,000 |
| Less: Rebate u/s 87A | NA | NA | (INR 25,000) |
| Health and education Cess 4% | INR 740 | INR 1,500 | NA |
| Net Tax Payable (annually) | INR 19,240 | INR 39,000 | NA |
A PERSON WITH AN ANNUAL INCOME OF INR 20,00,000
Imagine a person in their fifties, let’s call him Mr. Kumar. He earns a respectable income of INR 20,00,000 annually. Now, this isn’t solely from his job; it’s a blend of various sources. His primary source is his salary, fetching him INR 16,00,000. On top of that, he engages in trading, yielding him INR 2,00,000 in profits. Additionally, he has some savings parked in Fixed Deposits (FDs), which brings him INR 50,000 in interest. Lastly, Mr. Kumar also receives dividends, amounting to INR 1,50,000.
Solution
The following table shows the tax calculation under different regimes:
| Particulars | Tax under Old Regime | Tax under New Regime (up to AY 2023-24) | Tax under New Regime (AY 2024-25 onwards) |
| Income from Salary | INR 16,00,000 | INR 16,00,000 | INR 16,00,000 |
| Less: Standard Deduction | (INR 50,000) | NA | (INR 50,000) |
| Profit from Business & Profession | INR 2,00,000 | INR 2,00,000 | INR 2,00,000 |
| Income from Other Sources | INR 2,00,000 | INR 2,00,000 | INR 2,00,000 |
| Total headwise Income | INR 19,50,000 | INR 20,00,000 | INR 19,50,000 |
| Less: Deduction under chapter VI-A | |||
| Section 80C Deduction | (INR 1,50,000) | NA | NA |
| Section 80D Deduction | (INR 20,000) | NA | NA |
| Net Taxable Income | INR 17,80,000 | INR 20,00,000 | INR 19,50,000 |
| Total Tax Liability | INR 3,46,500 | INR 3,37,500 | INR 2,85,000 |
| Less: Rebate u/s 87A | NA | NA | NA |
| Health and education Cess 4% | INR 13,860 | INR 13,500 | INR 11,400 |
| Net Tax Payable (annually) | INR 3,60,360 | INR 3,51,000 | INR 2,96,400 |
Furthermore, it’s worth noting that taxes on incomes subject to special rates, such as long-term and short-term capital gains, will remain consistent across both the new and old tax regimes. In simpler terms, regardless of which tax system you choose, the rates for these types of income will not change. This aspect adds a layer of stability and predictability to the tax landscape, allowing taxpayers to make informed decisions about their financial strategies without the worry of fluctuating tax liabilities.
This table below gives a broad idea about the tax slab based on the income range applicable up to AY 2023-24:
Pros & Cons of New Tax Regime
Let’s delve into the merits and demerits of the new tax regime.
Pros:
- Lower Tax Rates and Simplified Compliance: The new system offers reduced tax rates, making it more pocket-friendly for taxpayers. Moreover, since many exemptions and deductions are omitted, the paperwork is streamlined, simplifying the tax filing process.
- Freedom from Locked Funds: Unlike the previous regime, where specific investments were necessary to avail deductions, the new system provides more flexibility. Taxpayers aren’t bound by prescribed instruments with lock-in periods. This benefits those who prefer open-ended investments, offering both good returns and the freedom to withdraw funds as needed.
- Enhanced Liquidity: With lower tax rates, taxpayers have more disposable income at their disposal. This is particularly beneficial for individuals unable to invest in specified instruments due to financial constraints or personal reasons.
- Customized Investment Choices: Unlike the traditional regime that limits investment options to specified instruments, the new system empowers taxpayers to customize their investment portfolios according to their preferences and financial goals.
Cons:
- Limited Deductions: One drawback of the new regime is the absence of certain specified deductions, which could have helped taxpayers reduce their taxable income further.
- Impact on Savings Culture: Since investments no longer offer tax benefits under Chapter VI-A, there’s a concern that the new regime may discourage the savings culture. This could potentially deter individuals from investing in long-term savings instruments, impacting their financial planning and security.
In summary, while the new tax regime offers several advantages such as lower tax rates and increased flexibility, it also comes with some drawbacks, including the lack of certain deductions and potential implications for savings behavior. It’s essential for taxpayers to carefully weigh these factors and choose the regime that best aligns with their financial objectives and circumstances.
Read More: Income Tax Slabs and Rates
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Official Income Tax Return filing website: https://incometaxindia.gov.in/
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