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The recent Indian budget introduced significant changes to the tax system, most notably the enhancement of the new tax regime, making it considerably more appealing to a wider range of taxpayers. The centerpiece of this reform is the elimination of tax liability for incomes up to ₹12 lakh, a measure widely celebrated across the country. However, a thorough examination reveals a more nuanced picture, with certain caveats and considerations that individuals must carefully weigh before making a decision about which tax regime to opt for.
While the zero tax up to ₹12 lakh is a powerful incentive, it's crucial to understand that this benefit applies exclusively to the new tax regime. The old tax regime continues to exist, and for some individuals, particularly those with high incomes and significant tax deductions, it might still prove advantageous. The new tax regime simplifies the tax structure by removing many deductions and exemptions found in the old system. However, this simplification comes at the cost of losing potential tax savings available under the older system. Therefore, the optimal choice depends on one's individual financial circumstances and the ability to maximize tax deductions available.
The ₹12 lakh threshold, while seemingly a straightforward benefit, is not a definitive zero tax guarantee. If one's taxable income reaches precisely ₹12 lakh, there is a calculated tax liability that is offset by a corresponding rebate, leading to a net tax payable of zero. However, even a small amount of income exceeding this limit will remove this rebate, resulting in a tax obligation. Marginal relief is provided to soften the impact of incomes slightly above the threshold but this isn't unlimited protection. For salaried individuals, the standard deduction of ₹75,000 pushes the virtually tax-free income limit to ₹12.75 lakh. This highlights the importance of accurately calculating one's taxable income and understanding the application of marginal relief.
A critical aspect to consider is the treatment of special income types, such as capital gains. The ₹12 lakh income limit for tax rebates does not encompass capital gains from investments like stocks or property sales. These gains are taxed separately, irrespective of the overall income from other sources. Therefore, combining salary income and capital gains to determine tax liability is incorrect; each income stream has its separate tax implications under both the old and new tax regimes. Consequently, individuals with substantial capital gains might find that the old tax regime, with its potential for various deductions and exemptions remains a more favorable option, despite the apparent benefits of the new structure.
Despite the shift toward the new regime, certain deductions remain applicable even if one's income exceeds the ₹12 lakh threshold. For instance, deductions on home loan interest, especially for rented-out properties, and employer contributions to the National Pension System (NPS) continue to be available. This indicates that even those not immediately benefiting from the zero tax provision can potentially leverage these allowances to reduce their total tax liability. This reinforces the need for thorough tax planning, irrespective of which tax regime is ultimately chosen.
Determining which regime is suitable requires careful analysis of individual financial circumstances. The break-even point, where the tax liability is the same under both regimes, shifts depending on one's income level. For income levels near ₹14 lakh, significant deductions are needed under the old regime to outweigh the benefits of the new system. This trend continues for higher income brackets; the higher your income, the more deductions you'll need to break even. This suggests that the new tax regime becomes increasingly favorable as income rises above a certain level, especially beyond ₹24 lakh, where the lower surcharge rate significantly lowers the tax burden in the new regime.
The old regime’s viability hinges largely on the ability to claim substantial tax deductions. Common deductions like those under section 80C (investments), medical insurance premiums, NPS contributions, and home loan interest can impact tax liability, however the new system significantly limits the potential tax advantages available with the old regime. The calculation of these deductions becomes crucial to determine which regime will result in a lower tax obligation. The availability of home loan interest deduction in both regimes under specific circumstances can sometimes influence this decision, but the effect is limited compared to the impact of other factors.
The house rent allowance (HRA) exemption, however, stands out as a potentially crucial factor favouring the old regime for specific individuals. Those with high incomes and substantial rental payments can significantly reduce their tax liability through this exemption. An illustrative example demonstrates how a high-income earner with high rental expenses can still benefit from the old regime by utilizing HRA deduction as the largest component of tax exemptions, potentially outweighing the advantage of the new system. Nonetheless, the magnitude of this benefit depends heavily on the rent amount and other deductions.
The new tax regime offers significant benefits overall. By widening the tax slabs and reducing the highest marginal rate to 30% after ₹24 lakh income, taxpayers can expect substantial tax savings. The increased rebate threshold from ₹7 lakh to ₹12 lakh represents a direct tax saving of ₹80,000 for those earning between these two amounts. The Finance Minister's examples of potential tax savings further illustrate these financial benefits. Although these figures may not reflect the exact savings for salaried individuals after factoring in the standard deduction, they offer a clear indication of the potential cost savings. The simplification and improved clarity of the new regime can also increase compliance and ease the administrative burden on taxpayers.
In conclusion, the choice between the old and new tax regimes demands a personalized approach. While the new regime's simplified structure and zero tax up to ₹12 lakh (with qualifications) are highly attractive for a large portion of taxpayers, high-income earners with significant deductions, particularly those with substantial HRA, may find the old regime remains more beneficial. A careful calculation of potential deductions and exemptions, considering individual income sources and spending patterns, is crucial for determining the most fiscally advantageous option.
Source: Goodbye old tax regime; new regime now more attractive