CTC vs take-home salary: How do the old and new tax regimes specifically impact FMCG and retail employees; key details

Old Tax Regime vs New Tax Regime: Are you confused about which tax regime to choose after the recent changes to the tax slabs introduced in the Union Budget 2024? Finance Minister Nirmala Sitharaman brought in changes to tax slabs and standard deductions, and here are the latest tweaks:

Under the updated New tax regime:

How much tax do I have to pay? Calculate now

Income under 3 lakh: Nil
Between 3 lakh and 7 lakh: 5 per cent
Between 7 lakh and 10 lakh: 10 per cent
Between 10 lakh and 12 lakh: 15 per cent
Between 12 lakh and 15 lakh: 20 per cent
Income above 15 lakh: 30 per cent

Old tax regime:
Income under 2.5 lakh: Nil
Between 2.5 lakh and 5 lakh: 5 per cent
Between Rs 5 lakh and Rs 10 lakh: 20 per cent
Income above Rs 10 lakh: 30 per cent

Standard deduction comparison:
New tax regime: Standard deduction has been increased from Rs 50,000 to Rs 75,000 in the latest Budget.
Old tax regime: Standard deduction under old tax regime remains unchanged.
 
Business Today spoke to Shefali Mundra, Tax expert, ClearTax, to understand the tax implications for FMCG and retail employees regarding CTC vs take-home salary. Edited excerpts:

CTC vs Take-home salary

The Cost to Company refers to the total expenditure a company makes on an employee, covering their basic salary, allowances, EPF contributions, and various other benefits. CTC is usually higher than the employee's take-home salary in order to attract potential candidates.

Take-home salary denotes the actual amount that an employee receives in their bank account each month after taxes and other deductions have been subtracted from their CTC.

BT. In what ways do the old and new tax systems affect employees in sectors such as FMCG and retail, whose total compensation includes various allowances and bonuses? 

SM: Under the Income Tax Act, there are two main tax regimes available to taxpayers in India: the Old Tax Regime and the New Tax Regime. While the choice between these regimes does not vary by sector, the key differences that influence this decision are important to understand. Each regime has its own tax rates, deductions, and benefits that can significantly impact take-home pay.

BT: How old tax regime is different from new tax regime?

SM: The old regime offers numerous deductions such as HRA, LTA, 80C and a standard deduction of Rs. 50,000 for salaried employees, whereas the new tax regime offers lower rates of taxes with a standard deduction of Rs. 75,000 for salaried employees but with fewer deductions. The ultimate choice between the two regimes for FMCG and retail employees is largely dependent on the extent of their allowances and bonuses. Choosing the old tax regime becomes an obvious choice for employees with higher deductions.

BT: Is there a noticeable change in the taxation policies for frontline retail workers compared to management-level employees under the new regime?

SM: Under the new tax regime, the differentiation in the tax implications for frontline retail staff and management-level employees is minimised to a large extent due to the uniformity of the tax slabs and limited tax-saving options. However, under the old tax regime, different types of employees could leverage various tax deductions and exemptions that aligned with their specific roles and compensation structures.  For instance, Frontline staff who could save more on taxes under the old regime benefitted more from exemptions like HRA or transport allowance, which are more relevant to their on-ground roles.  

Management-level employees, meanwhile, could utilize various deductions to reduce the tax outgo on take-home pay. In order to save taxes under the new regime, both frontline retail staff and management-level employees need to explore tax-saving options like the National Pension Scheme, which can provide relief to some extent.

BT: What tax-saving opportunities do employees with multiple allowances have under the old regime that are no longer available in the new regime? 

SM: Under the old tax regime, FMCG and retail sector employees have access to various tax-saving opportunities, which are not available under the new regime. The old tax regime allows for deductions for professional tax, house rent allowance, 80C investments deduction, leave travel allowance, standard deduction and much more.  For employees with diverse compensation components including multiple allowances, these deductions provided substantial relief in reducing taxable income.

For instance, the HRA component is a significant part of many retail employees' salary packages, especially for those in metro cities where rents are high. Under the old regime, they could deduct a considerable portion of their rent expenses, directly reducing their taxable income. Similarly, deductions under Section 80C for investments in provident funds, life insurance, and children's education fees also offered opportunities to reduce tax liabilities while encouraging savings and financial planning.

However, it is interesting to note that an individual earning Rs 50 lakh can face similar tax liabilities in both regimes if their deductions exceed certain thresholds (e.g., over Rs 3.75 lakh in deductions).

BT: In light of the evolving tax laws, what adjustments should employees in the FMCG and retail industries be mindful of that could impact their total compensation and net pay?

SM: The evolving tax laws in India, particularly with the introduction of revised tax slabs under the new tax regime and revised limits to certain deductions (standard deduction, family pension) necessitate continual awareness and adaptability, especially for employees in the dynamic sectors of FMCG and retail. The latest budget announcements have revised tax slabs to increase the standard deduction and adjusted the income levels at which different tax rates apply. These changes are designed to leave more disposable income in the hands of consumers, which can stimulate spending and benefit the retail sector broadly.

Understanding these changes is critical for employees to optimise overall tax liabilities and better financial planning. For instance, a revised standard deduction limit from Rs. 50,000 to Rs. 75,000 and changes in tax slab rates under the new regime offers relief to offset the loss of other deductions.