Looking at the favourable bias towards New Tax Regime I had anticipated that the Finance Minister will scrap the Old Tax Regime altogether but instead of doing it in one go she has put the old tax regime on ventilator. Let us understand the how the New Tax Regime will work with the latest amendments.
To whom this is applicable
How much tax do I have to pay? Calculate now
Against the general perception that new tax regime is available to individual only factually the new tax regime is applicable to all individual, HUF, Association of Persons (AOP) and Body of Individuals (BOI). This is available whether the qualifying tax entities are resident or non-residents.
Does the income up to Rs. 12 lakh become tax free for every tax payer?
A perception is being created among the general public that you do not have to pay any tax in case your income does not exceed the threshold of Rs. 12 lakhs. This is not true. Let me explain it in detail.
Under the old tax regime, the basic exemption limit remains Rs. 2.50 lakhs but under the new tax regime it has been increased from 3 lakhs to 4 lakhs. The first tax slab rate of 5% will apply to income between 4 lakhs and 8 lakhs and the tax rate will increase by 5% for each 4 lakh of income up to Rs. 24 lakhs and beyond which your income will get taxed at 30% under the new tax regime.
However, in case you are a resident individual you will not have to pay any tax on your regular income as long as your income, which is subject to slab rate taxation, does not exceed Rs. 12 lakhs due to rebate of tax available under section 87A of the income tax Act. The maximum rebate available under section 87 for new tax regime is Rs. 60,000/- whereas under the old tax regime is restricted to Rs. 12,500/-. So you do not have to pay any tax as long as your regular income does not exceed Rs. 12 lakhs. For salaried people it is Rs. 12.75 lakhs due to standard deduction available to them.
In case you are a non-resident individual or even a resident HUF, AOP or BOI you are not entitled to rebate under Section 87A and will have to pay tax at the slab rates under the new tax regime on income over 4 lakhs. Moreover, you still have to pay tax on your income which is subject to special rate of tax like tax on long term capital gains, short term capital gains on listed equity and equity funds, lottery, crypto currencies etc. even if your income does not exceed the threshold of Rs. 12 lakhs.
So in case your entire income comprises of long term capital gains of Rs. 5 lakhs, you will still have to pay tax on Rs. 1 lakh at 12.50% even if you are resident Individual and your income does not exceed the threshold limit of Rs. 12 lakhs for rebate under Section 87A under the new tax regime.
For whom the old tax regime still works?
Since the difference between basic exemption limit under old and new tax regime is Rs. 1.50 lakh, which is the amount of deduction available under Section 80C even for those who claim deduction under section 80C the old tax regime does not make sense. Then you are left with deduction under Section 80D for mediclaim and LTA and HRA. LTA benefit which can be claimed twice in a block of four years for domestic travel with your spouse, child, parents and dependent siblings, the amount can not exceed Rs. 50,000/- for each year. This benefit gets offset by lower tax rates offered under the new tax regime. Even for all those paying rent and claiming HRA exemption the old tax regime will not be so attractive. Persons who have business income the new tax regime in all the cases is attractive unless you have losses to carry for and set off.
The old tax regime will only be beneficial for those salaried people who are earning high salary and are claiming HRA benefits for significant amount of rent being paid specially in metro cities. Even amongst persons with income more than 5 crores the new tax regime is beneficial as surcharge payable on your income tax is capped at 25% against 37.50% under the old tax regime in case your taxable include excluding dividends and long term capital gains and short term capital gains on listed shares and equity scheme exceeds five crore rupees.
I feel that with the revamped new tax regime, almost 95 to 98% of the taxpayers will opt for new tax regime.
From the above discussion it becomes apparent that the old tax regime will be beneficial only for a limit number of taxpayers
Balwant Jain is a tax and investment expert and can be reached on jainbalwant@gmail.com and @jainbalwant on his X handle