The Budget 2023 did offer tax relief to the salaried class, but with a catch. While up to ₹7 lakh income per year will become tax free from the financial year 2023-24 but only if you opt for the new tax regime. In fact, all changes in tax slabs and rebates are linked to the new tax regime.
The exemption-free new tax regime was introduced in Budget 2020 which hardly appealed any as deduction-and exemption-rich old tax regime suited many who could save much higher taxes.
Interestingly, the government has now made the new regime the default one which suggests it is all set to phase out the old tax regime. It has also introduced a standard deduction of ₹50,000 under the new tax regime. Is the new tax regime now better?
One will have to do their own calculations. We have worked on four scenarios to help you do the maths. “Our analysis suggests the new tax regime will favour taxpayers with income of Rs. 7 lakh and individuals having an income above ₹5 crore,” says Vikas Kumar, Director at Vialto Partners.
Scenario one – ₹10 lakh income per annum
- The individual stays in a rented accommodation in a metro city. Hence, 50% of the salary has been considered for HRA calculation
- Rent paid - ₹15,000 per month
- Medical insurance premium - ₹5000 per annum
- The individual seeks ₹1.5 lakh exemption under Section 80-C
- Standard deduction of ₹50,000 applicable in old and new tax regime both
- Interest income from bank savings nil
In the old tax regime, total deductions will amount to ₹3.35 lakh. Net taxable income will come in at ₹6.65 lakh. Net tax payable after factoring in the education and health cess will be at ₹47,320.
In the new tax regime, net taxable income will come in at ₹9.5 lakh and net tax payable at ₹54,600.
Conclusion: Old regime is better in which you will save ₹7,280.
Scenario two – ₹20 lakh income per annum
- The individual stays in a rented accommodation in a metro city. Hence, 50% of the salary has been considered for HRA calculation
- Rent paid - ₹30,000 per month
- Medical insurance premium - ₹10,000 per annum
- The individual seeks ₹1.5 lakh exemption under Section 80-C
- Standard deduction of ₹50,000 applicable in old and new tax regime both
- Interest income from bank savings nil
In the old tax regime, total deductions will amount to ₹4.70 lakh. Net taxable income will come in at ₹15.30 lakh. Net tax payable after factoring in the education and health cess will be at ₹2.82 lakh. It will be ₹2.96 lakh under the new tax regime.
Conclusion: Old regime is better in which you will save ₹14,040.
Scenario three – ₹30 lakh income per annum
- HRA exemption not applicable
- The individual pays no rent as they have their own house and claims ₹2 lakh deduction on interest on housing loan
- Medical insurance premium - ₹25,000 per annum
- The individual seeks ₹1.5 lakh exemption under Section 80-C
- Standard deduction of ₹50,000 applicable in old and new tax regime both
- Interest income from bank savings – ₹15,000 ( ₹10,000 deduction is available under section 80TTA)
In the old tax regime, total deductions will amount to ₹4.35 lakh. Net taxable income will come in at ₹25.65 lakh. Net tax payable after factoring in the education and health cess will be at ₹6.05 lakh. It will come in at ₹6.08 lakh under the new tax regime.
Conclusion: Old regime is slightly better in which you will save ₹3,120.
Scenario four – Annual income above ₹5 crore
- HRA exemption not applicable
- The individual pays no rent as they have their own house and claims ₹2 lakh deduction on interest on housing loan
- Medical insurance premium - ₹75,000 per annum (including premium paid for senior citizen parents)
- The individual seeks ₹1.5 lakh exemption under Section 80-C
- Standard deduction of ₹50,000 applicable in old and new tax regime both
- Interest income from bank savings – ₹1 lakh ( ₹10,000 deduction is available under section 80TTA)
In the old tax regime, total deductions will amount to ₹4.85 lakh. Net taxable income will come in at ₹5.95 crore. Net tax payable after factoring in the education and health cess and surcharge will be at ₹2.51 crore. It will come in at ₹2.30 crore under the new tax regime.
Conclusion: New regime is better in which you will save ₹21.81 lakh.
Aprajita Sharma is a freelance journalist and a certified financial planner. She can be reached at @apri_sharma on Twitter and LinkedIn.