An alternative tax regime was introduced by the Union Budget 2020 (“New Tax Regime”). Since then, India has two taxation regimes for individuals. The Government intends to make ‘New Tax Regime’ more and more lucrative to individuals which is evident from the Budgetary proposals over the years.
The main tax regime (as existing prior to introduction of New Tax Regime) provides certain deductions like HRA, LTA, housing loan interest and 80 C deductions (“Old Tax Regime”). These deductions are not available in New Tax Regime but the tax slab rates in New Tax Regime are beneficial than the tax rates in old tax regime.
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The Finance Minister has proposed to add more sugar to the New Tax Regime. As per the tax rates proposed by the Union Budget 2025, there would not be any tax on income up to Rs 12 lakh in case of individual assessee taxable under New Tax regime. For salaries individuals, this limit is Rs 12.75 lakh as they get standard deduction of Rs 75,000 also in respect of their salary incomes.
Budget 2024, which was announced in July 2024, had reduced the surcharge applicable on individuals having income more than Rs 5 crore to 25% instead of 37% in case of New Tax regime. With this increase in exempt income from Rs 7 lakh to Rs 12 lakh in the New Tax regime, will embrace middle income class along with HNIs, to adopt New Tax Regime and saying goodbye to our very Old Tax regime.
The below table analyses tax implications for a salaried individual under Old and New Tax Regime.
|
Total Income |
Tax under Old Tax Regime* |
Tax under New Tax Regime** |
Tax Saving |
|
12,00,000 |
59,800 |
0 |
59,800 |
|
20,00,000 |
2,80,800 |
1,23,750 |
1,57,050 |
|
50,00,000 |
12,16,800 |
10,62,500 |
1,54,300 |
|
2,50,00,000 |
93,21,000 |
91,81,250 |
1,39,750 |
|
6,00,00,000 |
2,51,76,216 |
2,28,31,250 |
23,44,966 |
*Tax under Old Tax regime has been computed considering standard deduction of Rs 50,000, deduction u/s 80C for Rs 150,000, deduction under 80D for Rs 25,000, NPS – Rs 50,000 and housing loan interest of Rs. 200,000
** Tax under New Tax regime has been computed considering standard deduction of Rs 75,000.
The new tax proposals under the New Tax regime will surely take the sheen off from Old Tax regime. As is evident from the table, despite various deductions, Old Tax regime is proving to be tax inefficient and hence becoming a burden on the assesses as compared to New Tax regime.
Further, for availing these tax deductions, tax payers are required to maintain documentation and submit the same to the employer. Some of the deductions like LTA is restricted only in respect of travel cost and that too within India. For deduction under section 80C, many investments are locked for a long period. New Tax regime does not need any such long term commitment. New Tax regime is a simplified regime which is significantly less onerous.
In case where taxpayers have made existing commitments like large investments in tax saving instruments, large amount of house rentals, interest on housing loan and Mediclaim premiums, it is still advisable to conscientiously compare their tax liabilities under different regimes, before making a decision.
The new tax proposals under the New Tax regimes are like a final nail in the coffin of Old Tax regime. It may be a time to say good-bye to our Old Tax regime. It has served its purpose.
(The writer is Partner, Areete Law Offices and Rupali Singhania, Partner, Areete Consultants LLP)