New tax regime now more attractive for the salaried

The Budget for 2024-25 has introduced a slew of changes to the extant income tax slabs under the new tax regime (NTR), besides increasing standard deduction for salaried employees and pensioners, to leave more disposable income in the hands of individuals and provide a much-needed boost to consumption.

The changes are aimed at making the NTR more acceptable, even as provisional data so far suggests that around 70% of taxpayers have opted for the same, revenue secretary Sanjay Malhotra said in a post-Budget press conference. The changes, however, will be applicable from April 1, 2025.

The NTR, introduced through the Finance Act 2020, provides for an alternative tax regime, which offers lower tax rates for individuals and Hindu undivided families (HUF). But it also takes away various exemptions and deductions, which are part of the old tax regime.

As per the changes, the government has hiked the standard deduction for salaried employees to Rs 75,000 from Rs 50,000 at present; and for pensioners to Rs 25,000 from Rs 15,000 at present. “This will provide relief to about four crore salaried individuals and pensioners,” said finance minister Nirmala Sitharaman during her Budget speech.

The Rs 25,000 increase in standard deduction offers significant benefits, note tax experts. For the salaried, this means that no tax will be payable on a salary of up to Rs 7,75,000. “With the standard deduction of Rs 75,000, the taxable income reduces to Rs 7 lakh. Given that Section 87A remains unchanged, the employee will not owe any tax on this amount,” said Ankit Jain, partner, Ved Jain & Associates.

The extant slabs have been revamped, with the 5% tax rate now applicable on annual income between Rs 3 lakh– Rs 7 lakh, as against Rs 3 lakh – Rs 6 lakh applicable currently. Consequently, the 10% rate shall be applicable on Rs 7 lakh – Rs 10 lakh, as compared to Rs 6 lakh – Rs 9 lakh currently; and 15% will apply on annual income between Rs 10 lakh – Rs 12 lakh, as against Rs 9 lakh – Rs 12 lakh at present.

The 20% and the 30% personal income tax (PIT) rates remain unchanged under the new regime; and taxpayers having annual income up  to Rs 3 lakh are exempt from paying any tax. “As a result of these changes, a salaried employee in the NTR stands to save up to Rs 17,500 in income tax,” Sitharaman said.

Moreover, the Finance Bill has increased the deduction available on employer’s contribution to National Pension System (NPS) for private sector employees opting for the NTR from 10% to 14% of salary. The 14% rate of NPS contribution was already available for central and state government employees. Now, there would be parity in the rate of employer’s contribution towards NPS for government as well as private sector employees under the NTR.

Additionally, a new scheme has been introduced in the form of the National Pension System known as ‘NPS Vatsalya’ which will be a plan for contribution by parents and guardians for minors. On attaining the age of majority, the plan can be converted into a regular NPS account. “While the detailed schemes are awaited, these proposals are a welcome move aimed at channelising savings towards pension plans,” said Akhil Chandna, partner, Grant Thornton Bharat.

Meanwhile, the finance minister did not hike the limit on the deduction under Section 80C available under the old tax regime. The old regime, despite high personal income tax rates, remains a preferred choice for many taxpayers as it offer many “popular” deductions and exemptions.