Old Vs New Tax Regime: If the government hikes the basic exemption limits under the new and old tax regimes to Rs 5 lakh, as reports are suggesting, which tax regime will be better for individuals earning up to Rs 10 lakh per annum?
Old Vs New Tax Regime After Proposed Hike in Basic Tax Exemption Limit in Budget
Old Vs New Tax Regime: Taxpayers are widely expecting the government to hike basic tax exemption limits under both the new and old tax regimes in the upcoming budget. Under the old tax regime, the Income Tax Department currently offers an exemption on earnings up to Rs 2.5 lakh and Rs 3 lakh for senior citizens. The new tax regime offers a basic exemption limit on income up to Rs 3 lakh across all categories of taxpayers.
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At present, the old tax regime offers taxpayers more deductions and exemptions which bring the taxable income significantly. On the other hand, the tax department offered taxpayers six lower income tax slab rates. In budget 2023, the government also introduced Rs 50,000 standard deduction under the new tax regime and making income tax liability ‘Nil’ for individuals earning up to Rs 7.5 lakh per annum. This also includes rebate under Section 87A of the Income Tax Act.
Which tax regime will be better for you if govt hikes basic exemption limits to Rs 5 lakh?
Taxpayers must do a thorough evaluation of potential tax savings in case the government decides to hike the basic tax exemption limits to Rs 5 lakh under both tax regimes. This will help them determine the most beneficial option.
In order to compare the effective tax liabilities under both the old and new tax regimes assuming the government hikes the basic tax exemption limit to Rs 5 lakh under the new regime, let’s calculate the tax liabilities for an individual earning Rs 10 lakh annually. We will consider the standard deduction of Rs 50,000 under both scenarios. Dr. Suresh Surana, CA, gives an illustration of possible tweaks in tax slabs. The tax slabs might be adjusted accordingly to accommodate the higher exemption limit.
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Revised Tax Slabs (Old Tax Regime):
Up to Rs 5 lakh: ‘NIL’ tax
Rs 5 lakh to Rs 10 lakh: 20% tax
Above Rs 10 lakh: 30% tax
Revised Tax Slabs (New Tax regime):
Up to Rs 5 lakh: 0% tax
Rs 5 lakh to Rs 6 lakh: 5% tax
Rs 6 lakh to Rs 9 lakh: 10% tax
Rs 9 lakh to Rs 12 lakh: 15% tax
Rs 12 lakh to Rs 15 lakh: 25% tax
Above Rs 15 lakh: 30% tax
Note: These are illustrative slabs to demonstrate how the adjustments might look with an increased exemption limit. Actual tax slabs and rates would depend on the government’s tax policy decisions.
Old Tax Regime: Under the old tax regime, the individual can claim deductions such as standard deduction and apply slab rates to calculate tax.
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Tax Calculation under Old Regime: Assuming that the taxpayer earning Rs 10 lakh is availing of deduction and exemption benefits under the old tax regime.
Income Details:
Gross income: Rs 10 lakh
Deductions:
Standard Deduction: Rs 50,000
Taxable Income Calculation:
Gross income: Rs 10 lakh
Less: Standard Deduction: Rs 50,000
Less: 80C Deduction: Rs 1,50,000
Less: 80D Deduction: Rs 25,000
Taxable Income: Rs 7,75,000
Tax Calculation:
Up to Rs 5,00,000: No tax
Rs 5 lakh to Rs 10 lakh: 20% on (Rs 7,75,000 – Rs 5,00,000) = Rs 55,000
Total Tax Liability: Rs 55,000
New Tax Regime (Assuming Basic Exemption Limit Raised to Rs 5 lakh)
Under the new tax regime with the assumed revised tax slabs, let’s calculate the tax liability.
Tax Calculation under New Regime:
Income Details:
Gross Income: Rs 10 lakh
Deductions:
Standard Deduction: Rs 50,000
Taxable Income Calculation:
Gross Income: Rs 10 lakh
Less: Standard Deduction: Rs 50,000
Taxable Income: Rs 9.5 lakh
Tax Calculation (revised assumed slabs):
Up to Rs 5 lakh: ‘NIL’ tax
Rs 5 lakh to Rs 6 lakh: 5% on (Rs 6 lakh – Rs 5 lakh) = Rs 5,000
Rs 6 lakh to Rs 9 lakh: 10% on (Rs 9 lakh – Rs 6 lakh) = Rs 30,000
Rs 9 lakh to Rs 12 lakh: 15% on (Rs 9.5 lakh – Rs 9 lakh) = Rs 7,500
Total Tax Liability: Rs 5,000 + Rs 30,000 + Rs 7,500 = Rs 42,500
Comparison:
Old Tax Regime Total Tax Liability: Rs 55,000
New Tax Regime Total Tax Liability: Rs 42,500
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Conclusion:
Therefore, based on the above calculations, the new tax regime with the increased basic exemption limit of Rs 5 lakh is better for individuals earning Rs 10 lakh annually, as it reduces their overall tax burden substantially compared to the old tax regime. This assumes the government implements the revised tax slabs as per the assumed structure provided earlier.
However, the beneficial tax regime needs to be determined on consideration of facts of each case and evaluation under both old tax regime and new tax regime. For instance, if the taxpayer were to avail further deductions under the old tax regime (such as home loan interest u/s 24(b), contribution to provident fund, etc.), the old tax regime may prove to be more beneficial.
