As the government has proposed to make the new tax regime as a default tax regime, taxpayers will now have to voluntarily opt for the old structure to reduce their tax liability. They must evaluate all the possible deductions claimed, including house rent allowance (HRA), and then decide on the tax regime to opt in.
The new tax regime was inserted in the Finance Act, 2020. However, taxpayers were reluctant to opt for it as it was not beneficial to those opting for some deductions. To make the regime more attractive, the government proposed that income up to Rs 7 lakh in a financial year will be tax-exempt. It increased the basic exemption limit to Rs 3 lakh from Rs 2.5 lakh and also allowed standard deduction for the salaried and pensioners.
An analysis shows that the new tax regime will benefit small taxpayers who do not intend to make any investments in tax saving instruments and look for cash liquidity. Maneesh Bawa, executive director, Nangia Andersen LLP, says before choosing the new regime a taxpayer must do a cost-benefit analysis to see whether the deductions such as house rent allowance, interest on housing loan, deduction on tax saving investments, etc., result in lower tax payable or not.
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Do the maths
For instance, those earning up to Rs 7 lakh will not have to pay any tax under the new tax regime if they opt for it in assessment year 2024-25 as tax rebate under Section 87A of up to Rs 25,000 for taxpayers earning taxable income up to Rs 7 lakh per annum will be applicable. However, even those earning the same amount will not have to pay any tax even in the old regime if they take some of the deductions such as tax-savings of Rs 1.5 lakh under Section 80C, standard deduction of Rs 50,000 and even health insurance of Rs 25,000. Of course, opting for the new regime will be really hassle-free for them.
However, taxpayers with higher income and availing most possible deductions will still benefit from the old tax regime. For instance, a taxpayer earning Rs 15 lakh will have taxable income of 9,65,000 after most deductions and will have to pay tax of Rs 1,09,720 under the old regime as compared to a higher Rs 1,45,600 in the new regime.
Similarly, those with a total income of Rs 20 lakh will benefit from the old regime (See graphic). Those availing HRA benefits in the higher tax bracket will also stand to gain more in the old tax regime.
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Similarly, senior citizens (aged 60-80 years) earning above Rs 15 lakh a year will continue to gain from the tax regime, provided they avail deductions under Sections 80C and 80D, and Section 80TTD (exemption on interest from deposits in case of senior citizens up to Rs 50,000) and standard deduction for pensioners.
Taxpayers must note that if they have income from business or profession and want to move from the new regime to the old regime they can exercise the option of returning to the new regime only once. However, a person not having income from business or profession shall be able to exercise this option every year.