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Mon Feb 13 2023
With the recent budget session, the finance minister has introduced a set of new tax rules with more tax slabs and regulations along with keeping the old regime intact. As a result, taxpayers are now contemplating whether to opt for the new or old regime.
With this comprehensive guide, you can pick the suitable option to maximize the benefits.
The recent changes in the tax laws have been a significant overhaul aimed at simplifying the tax code. The notion here is to make it simpler for individuals as well as businesses to comply with their tax obligations. Some of the fundamental changes introduced in this FY 23-24 are:
The good news is that this change allows taxpayers to choose between two tax regimes. The new tax regime is the default tax regime. However, if you prefer, you can continue with the previous tax regime instead of switching to the new one.
The old regime allows taxpayers to claim tax exemptions under nearly 70 deductions available under various sections of the income tax laws. However, the new rule features fixed tax rates lower than the old regime but with fewer deductions. Taxpayers can choose the regime that best suits their financial needs.
If you are salaried, here is how you need to calculate your taxes:
Typically, your income salary will comprise various components:
You can find the details on your Form 16, which will be provided by your employer. However, the income tax calculation need not include specific allowances like telephone bill reimbursements and leave travel allowances. Also, if you receive HRA and live in a rented space, you can avail yourself of tax exemptions on HRA.
In addition to the existing exemptions, the 2018 budget introduced a standard deduction of Rs 40,000. This was later increased to Rs 50,000 in the 2019 budget and Budget 2023. The new tax regime also offers a standard deduction of Rs 50,000.
Let us understand income tax under the old tax slabs and new tax slabs as an example.
Mr X, a salaried individual provides the following information
(In case you earn from multiple sources, you need to include all the earning details while filing your ITR. Such as your capital gains, earnings from rental properties, income from self-employment or business)
During the year, Mr. X has made the following investments eligible for deduction under the Old Regime-
Here is how you can determine which tax regime works best for you:
Considering these points, you can determine which tax regime is more suitable for your financial situation.
The break-even salary for tax purposes is estimated to be around Rs. 7.5 lakhs. Under the old tax regime, if a person earns Rs. 7.5 lakhs and claims all possible deductions and exemptions, they can reduce their taxable income to Rs. 5 lakhs, resulting in zero tax liability. On the other hand, if the same individual opts for the new tax regime, they can claim a standard deduction of Rs. 50,000 and a rebate for income up to 7 lakhs, resulting in zero tax liability.
For individuals with an income of Rs. 10 lakhs, both regimes are tax-neutral if they claim deductions and exemptions of up to Rs. 3 lakhs. However, if the deductions claimed are less than Rs. 3 lakhs, the new tax regime is more advantageous.
Similarly, for a gross income of Rs. 12.5 lakhs, a deduction amount (Eg - 80C, 80D, Housing loan etc.)) of Rs. 3,62,500 is required to make the old tax regime more beneficial. For an income of Rs. 15 lakhs, the exemption claims must be at least Rs. 4,08,332; for an income over Rs. 20 lakhs, the exemptions must be over Rs. 4,25,000 to make the old regime more favourable.
Consider the pros and cons of both tax regimes to choose the one suitable for you.
byRhea Tripathy
Meet Rhea Tripathy, a word wizard with a pen in one hand and a paintbrush in the other. By day, she slays as a content writer and by night, she indulges in her artistic passion. With a keen eye for the markets and a knack for literature, this certified trader brings her sharp mind and creative flair to everything she does. When she's not crafting clever content, you'll find her analyzing the latest market trends or getting lost in a good book.