New tax regime: Ideal for those with higher incomes

By Neeraj Agarwala

The Union Budget 2024 has brought notable changes in the slab rates for taxpayers opting for the new tax regime (NTR), while the old tax regime’s (OTR) slab rates remain unchanged. The updated slab rates under the NTR aim to provide relief and incentivise taxpayers, particularly salaried individuals.

The revision in slab rates under the NTR can lead to additional tax savings of up to Rs 10,000 for those choosing this option. In a bid to further encourage a shift towards the new regime, the standard deduction has been proposed to be increased by 50%, from Rs 50,000 to Rs 75,000. With these two changes, a salaried employee stands to save up to Rs 17,500.  

Choosing between regimes: A closer look

On the surface, the NTR may seem like the preferable choice. For example, an income of Rs 7 lakh is taxed at 5% under the new regime, while the same income might be taxed at 20% under the OTR. However, NTR might not be suitable for everyone.

A key feature of the NTR is a 100% tax rebate for net incomes up to Rs 7 lakh, against that under the OTR available only up to Rs 5 lakh. Coupled with the increase in standard deduction under the NTR, taxpayers with a gross income up to Rs 7.75 lakh may find the NTR more beneficial, as the tax payable would be zero.

For those with incomes above Rs 7.75 lakh, the decision between the old and new regimes depends on the deductions availed. The NTR does not permit deductions for house rent allowance, interest on housing loans, and various deductions under Chapter VIA (except Sections 80CCD(2) and 80JJAA). Thus, if the tax savings from eligible deductions under the old regime outweigh the benefits of the new regime’s lower rates and increased standard deduction, the old regime may be the better option.

For those with self-occupied property, the tax deductions under the OTR may be limited. If the property was purchased with a loan, they can claim a deduction of house interest under Section 24 up to Rs 2 lakh, in addition to deductions under Section 80C and Section 80D up to Rs 2.25 lakh. Thus, if a taxpayer is eligible for a total deduction of Rs 4.25 lakh, the OTR may be advantageous for those with a gross income of less than Rs 15.75 lakh.

Also, for taxpayers living in rented accommodations and claiming HRA, the deduction can be 50% or 40% of salary (basic salary + DA). For these individuals, the OTR may be more beneficial. The NTR appears to favour taxpayers with higher incomes and fewer deductions. This shift reflects the intention to move away from a deduction-focused system to one with straightforward, lower tax slabs. Taxpayers need not submit extensive documentation and employers can easily calculate TDS.

It is prudent for taxpayers to assess their income tax liabilities under both regimes to determine the most favourable option. By delving into the specifics of these provisions, taxpayers can make informed decisions to maximise their tax efficiency.

The writer is partner, Nangia & Co. With inputs from Neetu Brahma. Views are personal.