The Finance Minister, in her Union Budget 2023, has announced substantial changes to the slab rates under the new tax regime, which would be applicable from financial year ending March 31, 2024 (Assessment Year 2024-25). This article attempts to bring more clarity on this issue.
The Central Board of Direct Taxes (CBDT), vide Circular No. 04/2023, made it COMPULSORY for employers to seek information from their employees on whether they wish to opt for the new regime or the old regime. On the basis of this declaration, the employer shall accordingly deduct TDS on salaries applying the respective slab rates.
It has also stated that the default regime will be the new regime, i.e. to say that if the employee does not opt for the new or old regime, the new regime will be followed. This could lead to HIGHER taxes for the employee! In any case, a second chance is given to the employee when he files the return for the year, but that will only entail claiming a refund from the Income Tax Department, which would take its time to process the return and issue the refund.
New Regime vs Old Regime:
The difference between the two, simply said, is:
New Regime - Income taxed at Lower Tax Rates without Deductions
Old Regime - Income taxed at Higher Tax Rates with Deductions
Parameters | New Regime | Old Regime |
|---|---|---|
Basic Exemption Limit | Rs. 2,50,000 | Rs. 3,00,000 |
Income Tax Rebate Limit | Rs. 5,00,000 | Rs. 7,00,000 |
Standard Deduction on Salary | Rs. 50,000 | Rs. 50,000 |
The crux of the decision to adopt new or old regime lies with whether the deductions offer better tax incentives or the tax rates do.
Slab Rates Under Old Regime:
Rs. 0 to Rs. 2.50 Lakhs - Nil
Rs. 2.50 Lakhs to Rs. 5.00 Lakhs - 5%
Rs. 5.00 to Rs. 10.00 Lakhs - 20%
Above Rs. 10.00 Lakhs - 30%
Slab Rates Under New Regime:
Rs. 0 to Rs. 3.00 Lakhs - Nil
Rs. 3.00 Lakhs to Rs. 6.00 Lakhs - 5%
Rs. 6.00 Lakhs to Rs. 9.00 Lakhs - 10%
Rs. 9.00 Lakhs to Rs. 12.00 Lakhs - 15%
Rs. 12.00 Lakhs to Rs. 15.00 Lakhs - 20%
Above Rs. 15.00 Lakhs - 30%
Deductions and Exemptions Available:
The following deductions available under the old scheme ARE NOT available under the new scheme:
Investments under Section 80C (PPF, ELSS, EPF, Life Insurance Premium), Home Loan Principal, etc)
Home Loan Interest allowable u/s 24
Health Insurance Premium / Medical Expenditure allowable u/s 80D
Expenses on medical treatment, training or rehabilitation of a disabled dependent, treatment of self or dependent for specified disease (Sec 80DD and 80DDB)
Contribution to NPS (Sec 80CCD)
Interest paid on Education Loan (Sec 80E)
Donation to specified institutions (Sec 80G)
House Rent Allowance and leave travel allowance u/s 10
Under the new scheme, the following deductions ARE allowed:
Employer’s contribution to NPS
Exemption for VRS, gratuity and leave encashment
Interest on PPF / Sukanya Samridhi Scheme etc. remain untaxed in both schemes
How to Decide on Which Scheme to Opt for?
The best way to decide is to weigh both options monetarily:
Calculate the income under both schemes- one with the deductions, other without the deductions
Calculate tax payable under both schemes- one at higher rate, another at concessional rates
Compare the two
Please note that, if your income (before any deduction) is less than Rs. 7.00 lakhs, the new scheme is better, since there is no tax in the new scheme due to rebate.
The following is a table that suggests a quick-fix decision-making tool:
Income (Before Deductions) | Deductions (other than standard deduction on salary) | Scheme that will be Beneficial |
|---|---|---|
Rs. 8,00,000 | More than Rs. 1,87,500 | Old Scheme |
Rs. 8,00,000 | Less than Rs. 1,87,500 | New Scheme |
Rs. 9,00,000 | More than Rs. 2,37,500 | Old Scheme |
Rs. 9,00,000 | Less than Rs. 2,37,500 | New Scheme |
Rs. 10,00,000 | More than Rs. 2,62,500 | Old Scheme |
Rs. 10,00,000 | Less than Rs. 2,62,500 | New Scheme |
Rs. 13,00,000 | More than Rs. 3,08,333 | Old Scheme |
Rs. 13,00,000 | Less than Rs. 3,08,333 | New Scheme |
Rs. 15,00,000 | More than Rs. 3,75,000 | Old Scheme |
Rs. 15,00,000 | Less than Rs. 3,75,000 | New Scheme |
Assessees are requested to obtain professional assistance if there is any room for doubt.