Finance Minister Nirmala Sitharaman has proposed several changes to the personal income tax system in the Union Budget 2023-24 with the aim of benefiting the taxpayer. The income tax rebate limit has been increased from Rs 5 to Rs 7 lakh, the tax brackets have been restructured and the new tax regime has become the default system for everyone.
Until now, the limit for the income tax rebate allowed under Section 87A of the Income Tax Act for both the old and new tax regimes has been Rs 5 lakh. This meant that those with an annual income of up to Rs 5 lakh would not have to pay taxes. The old tax regime had a higher tax rate but provided for exemptions. The new tax regime meanwhile had a lower tax rate, but no exemptions could be claimed. Now the tax-free ceiling has been increased to Rs 7 lakh, but only for those who opt for the new tax regime.
The tax brackets in the new tax regime have also been revised. The tax-free plate has been increased by Rs 50,000. Now, earnings between Rs 0 and Rs 3 lakh are not taxed. Previously, the base tax exemption limit under both regimes was Rs 2.5 lakh. In addition, the number of slabs in the new tag regime has been reduced to five.
According to Finance Minister Nirmala Sitharaman, “Income tax has undergone substantial changes (in the budget) which will benefit the middle class. The new tax regime has now gained more traction and incentive, so that people can now move from the old to the new regime without hesitation.”
Now that the new tax regime has been declared in default, taxpayers will have to indicate in the new financial year whether they wish to opt for the old tax regime. Otherwise, income tax for everyone will be calculated according to the proposed new tax regime.
Since the announcement of the 2023 budget, many taxpayers have tried to analyze which tax regime will bring them more benefits. For the time being, taxpayers can choose between the old tax regime and the existing new tax regime. The proposed new tax regime will apply to income earned in the new fiscal year.
Below we have tried to explain whether you should switch to the new tax regime or stick with the old one to save more.
It should be noted that in the cases below, all persons in the new tax regime have claimed Rs 50,000 standard deduction, Rs 1.5 lakh deductions under Section 80C of the Income Tax Act, Rs 50,000 deduction for investments in the National Pension Scheme ( NPS) under Section 80CCD (1B), and tax exemption of Rs 75,000 on HRA and home loan. Here, the total deductions and exemptions come to Rs 3,25,000.
On the other hand, there are no deductions or exemptions available in the existing new tax regime, so that the actual income in each scenario is equal to the taxable income. A standard deduction of Rs 50,000 is allowed under the proposed new tax regime.
Income of Rs 8 lakh (old tax scheme)
If a wage earner earns an annual income of Rs 8 lakh, then his taxable income after claiming all deductions and exemptions is Rs 4,75,000 under the old tax regime. Since this is below the discount limit of Rs 5 lakh, the person does not have to pay tax here.
Income of Rs 8 lakh (existing new tax scheme)
For a person with an annual income of Rs 8 lakh and who has opted for the existing new tax regime, his taxable remains the same as his actual income. As this exceeds the rebate limit of Rs 5 lakh, the person will have to pay an income tax of Rs 46,800. This implies that such taxpayers will have to pay Rs 46,800 more income tax in the existing new regime as compared to the old one.
Income of Rs 10 lakh (old tax scheme)
If a taxpayer with an annual income of Rs 10 lakh claims all deductions and exemptions available under the old tax regime, his taxable income becomes Rs 6,75,000. The tax to be paid on this is Rs 49,400 which includes education tax.
Income of Rs 10 lakh (existing new tax scheme)
Under the existing new tax regime, a taxpayer with an annual income of Rs 10 lakh has to pay Rs 78,000 as tax on a taxable income of Rs 10 lakh. This means that by switching to the new tax regime, you will have to pay Rs 28,600 more income tax.
Income of Rs 15 lakh (old tax scheme)
The taxable income for a person with an annual income of Rs 15 lakh comes to Rs 11,75,000 under the old tax regime. After taxation according to the applicable tax brackets, the person has to pay Rs 1,71,600 as income tax.
Income of Rs 15 lakh (existing new tax scheme)
For a salaried worker with an annual income of Rs 15 lakh, he has to pay Rs 1,95,000 income tax on a taxable income of Rs 15 lakh. If you compare this to the old regime, you pay Rs 23,400 more income tax here.
Income of Rs 20 lakh (old tax regime)
For an annual income of Rs 20 lakh, the tax is calculated at Rs 16,75,000 after the deductions and exemptions are claimed in the old tax regime. The tax payable here comes to Rs 3,27,600.
Income of Rs 20 lakh (existing new tax scheme)
Under the existing new tax regime, a person with an annual salary of Rs 20 lakh pays Rs 3,51,000 income tax on Rs 20 lakh taxable income. Again, adopting the new tax regime will cost you Rs 23,400 more in income tax.
Income of Rs 25 lakh (old tax scheme)
Under the old tax regime, a person with a salary of Rs 25 lakh per annum pays Rs 4,83,600 income tax. The taxable income here is Rs 21,75,000 which is subject to taxation under various tax brackets.
Income of Rs 25 lakh (existing new tax scheme)
Under the existing new tax regime, a person with an annual salary of Rs 25 lakh pays Rs 5,07,000 income tax. This is again Rs 23,400 more than what the same person would have paid under the old tax regime.
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