The Indian government introduced a new tax regime in the 2020 Union Budget as a simpler alternative to the existing system for individuals and HUFs. This regime offers lower rates but requires forfeiting certain deductions and exemptions traditionally available under the old regime.
As the FY 2023-24 tax filing deadline nears, it’s crucial to understand the details of the new default tax regime. Taxpayers wishing to stick with the old regime need to explicitly opt out on their return forms, making an informed choice essential.
Significant changes under the new regime include the elimination of several deductions such as those under Sections 80C, 80D, and HRA, among others. This means no deductions for things like EPF, PPF, life insurance, or health premiums, which could impact savings strategies.
However, the new regime still allows some deductions, like a standard deduction of Rs 50,000 and employer contributions to NPS under Section 80CCD(2). Additionally, there’s a tax rebate under Section 87A that eliminates the tax liability for incomes up to Rs 7 lakhs.
Tax rates under the new regime range from nil for incomes up to Rs 3 lakhs to 30% for incomes above Rs 15 lakhs, with a reduction in the highest surcharge rate leading to a lower maximum effective tax rate of 39% compared to the old regime’s 42.744%.
Tax Regime FAQs:
What does the Old Tax Regime entail?
The old tax regime offers various deductions and exemptions under multiple sections of the Income Tax Act, of 1961. These can considerably lower your taxable income, though they do require more detailed paperwork and calculations.
What defines the New Tax Regime?
Launched in 2020, the new tax regime features reduced tax rates but does away with most of the deductions and exemptions that the old regime provides. This makes tax filing simpler but might not yield the most tax savings for everyone, especially for those who benefit from the old regime’s deductions.
How do the old and new tax regimes differ?
The primary differences lie in the tax rates and slab structures. The old regime allows various deductions and exemptions, which can reduce taxable income. In contrast, the new regime has lower tax rates but offers fewer deductions and exemptions.
Which tax regime is more advantageous?
Choosing between the old and new tax regimes depends on individual financial circumstances. It’s recommended to conduct a thorough comparison and analysis of both regimes. Taxpayers can use the Income and Tax Calculator available on the Income Tax Portal to estimate and compare their tax liabilities under both regimes.
Must an employee inform their employer about their choice of tax regime?
Yes, employees must notify their employer of their chosen tax regime during the fiscal year. If no choice is communicated, it will be assumed that the employee has opted for the new default tax regime. Consequently, the employer will calculate tax deductions according to the rates specified under section 115BAC.
