New Income Tax Regime: The Old One Is Still Attractive With Higher Deductions

Budget 2023 has provided a boost to the new income tax regime with several measures to make it more attractive for taxpayers. Calculations show that if you are not taking the full benefit of deductions under the old regime, including Section 80C, medical insurance plus full benefit of housing loan interest deduction, then the new regime looks attractive. However, if the full deductions are taken, the old regime will have a lower tax impact.

Choose Right

The biggest impact is likely to be from a non financial measure. The new tax regime will now be the default option. What this means is that if you do nothing, then the tax calculation will be as per the new regime. And if you want to stick to the old regime, then you will need to specify that you will stick to the old regime.

This is a big change from the current system where the default is the old regime, and only if you want to go to the new regime, you have to make the change.

The importance of this move is rooted in human behaviour because it has been proven that it is far difficult to get people to choose an option different from what they have now. People tend to do nothing, so the default option becomes the automatic choice. This simple switch will make the new tax regime be chosen more by taxpayers.

To be sure, there are now several other changes that have been made. 

Standard Deduction Available

For the salaried class plus those getting pension and family pension, they have the benefit of a standard deduction under the old regime. The good news is that this becomes the only deduction that is carried over to the new regime. So, a deduction, which is reduction of the taxable income, is available in the new tax regime too.

Change Of Slabs

The old tax regime has three slabs with a rate of 5%, 20% and 30%, respectively, where the Rs 5 to 10 lakh slab has 20%, and the highest tax slab starts after Rs 10 lakh. But this is applicable after deductions, so it’s important what all you claim.

The existing slabs in the new tax regime are in blocks of Rs 2.5 lakh each, so the income from Rs 2.5 lakh to Rs 5 lakh is taxed at 5%, and then the next block is at 10% and so on. The blocks have now been revised to Rs 3 lakh each, so the 5% slabs is for Rs 3 to 6 lakh. Then, the 10% rate is for Rs 6 to 9 lakh and so on.

The tax impact is now lower by a significant amount for those not taking benefit of all the deductions currently. For example, a non salaried taxpayer with Rs 10 lakh in gross income, taking Rs 2 lakh worth of deductions (covering Section 80C of Rs 1.5 lakh plus medical insurance premium and savings bank interest deduction) would pay Rs 72,500 without education cess in the old regime, but only Rs 60,000 without education cess in the new regime under the new rates. Most youngsters fall in this category because they might not have a housing loan yet.

If you are taking the deduction of Rs 2 lakh for housing loan interest, too, then the situation changes. So, a person taking deductions of Rs 4 lakh, which includes Rs 2 lakh of housing loan interest and an income of Rs 12 lakh would pay Rs 72,500 under the old regime. Under the new regime, it would come to Rs 90,000. So, in this case, it makes more sense to stick to the old regime.

A person with an income of Rs 15 lakh would have paid Rs 1,42,500 without cess, after taking a deduction of Rs 4 lakh under various heads under the old regime, and would pay Rs 1,50,000 without cess under the new regime. This is still slightly higher under the new regime.

Rebate

There is a rebate available under Section 87A of the Income Tax Act. This reduces the tax that you have to pay if the taxable income is below a certain limit. The current limit is Rs 5 lakh under the old tax regime and this will be higher at Rs 7 lakh in the new regime. This means more money will not have a final tax outflow for those with not-so-high income.

Surcharge

The rich also have a cause for a lower tax impact in the new regime because the highest surcharge has been reduced to 25% from 37% that is present in the old tax regime for income above Rs 2 crore. This will cap the maximum tax rate under the new regime at 39% after considering cess.

Arnav Pandya is founder, Moneyeduschool.