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The Union Budget 2023 introduced several changes to the tax structure, sparking discussions among taxpayers about whether to choose the old or new tax regime. In subsequent Budgets, including the one for 2024, the government made efforts to promote the adoption of the new tax regime. While the new tax regime has become the default option, the old tax regime remains available for those who wish to continue using it.

This article explores the differences between the two regimes, key updates, and how to determine which regime suits your financial situation.

Key Changes in Budget 2024

The following updates were proposed under the new tax regime for FY 2024-25:

• Revised Tax Slabs: The tax slabs were modified to reduce the tax burden for certain income groups. The updated slabs are:

• Standard Deduction Increase: The standard deduction under the new tax regime rose to ₹75,000, compared to ₹50,000 earlier.
• Family Pension Deduction: The deduction on family pensions increased from ₹15,000 to ₹25,000.
• Tax Rebate Extension: The rebate under Section 87A now applies to incomes up to ₹7 lakh, as opposed to the ₹5 lakh limit under the old regime.
• Reduced Surcharge: For individuals earning over ₹5 crore, the surcharge rate dropped from 37% to 25%, effectively lowering the tax rate for high-income taxpayers.

New Tax Regime: Features and Changes

The new tax regime, introduced in Budget 2020, offered concessional rates but disallowed most exemptions and deductions. While initially met with limited adoption, several incentives were introduced in subsequent budgets to encourage its use:

• Simplified Tax Structure: The new regime provides a straightforward tax structure without the need to claim numerous deductions.
• Default Option: Starting FY 2023-24, the new regime is the default. However, taxpayers can opt for the old regime by filing Form 10-IEA.
• Leave Encashment: The exemption limit for leave encashment for non-government employees has increased to ₹25 lakh.
• Who Benefits? Individuals with fewer investments or limited tax-saving expenditures may find the new regime more suitable due to lower tax rates.

Old Tax Regime: Key Highlights

The old tax regime allows taxpayers to reduce their taxable income through various exemptions and deductions, such as:

• Section 80C Deductions: Tax-saving instruments like PPF, ELSS, and life insurance premiums allow a deduction of up to ₹1.5 lakh.
• HRA and LTA: Taxpayers can claim exemptions for House Rent Allowance and Leave Travel Allowance.
• Medical Insurance (80D): Premiums paid for health insurance qualify for deductions.

This regime may be advantageous for those with substantial investments and eligible deductions.

Comparison of Old vs New Tax Regime

Tax Rates

Deductions and Exemptions

Deciding Between the Two Regimes

The choice depends on individual financial circumstances. Here are some scenarios:

1. Low Deductions (<₹1.5 lakh): The new regime is more beneficial due to lower tax rates.
2. High Deductions (>₹3.75 lakh): The old regime offers greater tax savings.
3. Moderate Deductions (₹1.5 lakh - ₹3.75 lakh): Calculate and compare tax liability under both regimes.

Example:

• Income: ₹12 lakh
• Deductions: ₹2 lakh
• Old Regime Tax: ₹95,800
• New Regime Tax: ₹93,600
• Conclusion: The old regime saves more tax due to higher deductions.

Conclusion

Choosing between the old and new tax regimes requires careful evaluation of your income, eligible deductions, and financial priorities. While the new regime simplifies tax filing and benefits those with limited deductions, the old regime may result in substantial tax savings for individuals with significant investments and eligible expenses.

To make an informed decision, consider using a tax calculator and consult a tax advisor if necessary. By planning ahead, you can maximize your savings and align your tax strategy with your financial goals.