Understanding the Details of New Tax Regime

Through this article, you will gain an understanding of the updates in the new tax regime for FY 2023-24 and AY 2024-25. Before we give you the glimpse of the updates in the new tax regime for the financial year 2023-24, let us understand what exactly is new tax regime.

Table of Contents

• What is the New Tax Regime?
• Features of New Tax Regime
• Impact of New Tax Regime
• Income Tax Slab Rate
• Why Should You Opt For New Regime?
• When to Choose Old Tax and New Tax Regime?

What is the New Tax Regime?

The new tax regime is a set of revised tax rules that were introduced for several purposes. This includes simplifying tax calculations, reducing tax rates and ensuring that taxpayers comply with the tax laws. As per the new tax regime, several changes have been made. This includes changes in the income tax slab, tax rebate, deductions as well as other benefits.

In the Budget 2023, as per the Income Tax Act 1961, the basic exemption limit is now Rs 2.5 lakh. The Income Tax Department oversees this new tax regime, which is important for those earning income exceeding certain levels, especially given the highest surcharge rate. A significant change is the increase of tax benefits to Rs 7 lakh. 

This is significant for taxpayers, including those above 60 years. The due date for filing ITRs remains a key deadline under this regime. The new tax regime aims to simplify tax filing while ensuring fairness.

Features of New Tax Regime

The new regime has the following features:

1. Income Tax Slabs and Rates: According to the new tax regime, the highest tax rate of 30% is applicable to incomes above Rs 15 lakh. There is no tax for income upto Rs 3 lakh. For income between Rs 3 to Rs 6 lakh, a tax rate of 5% is applied​​.
2. Tax Rebate and Default Regime: The tax rebate has been raised to 7 lakh from Rs 5 lakh under the new regime. Additionally, the new tax regime is the default unless the taxpayer chooses to adopt the old regime​​.
3. Deductions and Exemptions: The new tax regime aims to simplify the tax filing process by reducing the number of available deductions and exemptions. For instance, under the old regime, deductions like Section 80C (tax exemption limit of Rs 1.5 Lakh), Section 80D (health insurance premium tax deductions), and others are available. These deductions are not claimable under the new regime​​.
4. Other Benefits and Allowances: Benefits like Leave Encashment and tax exemptions on certain allowances (like conveyance allowance) and interest on EPF accounts are applicable in both the old and new tax regimes. However, the new regime restricts the amount of deductions and exemptions that can be claimed​​.

Impact of New Tax Regime

On Taxpayers:

• For low-income earners (up to Rs 5 lakh): the new regime may reduce the tax burden due to zero tax liability up to Rs 2.5 lakh.
• Middle-income earners (around Rs 10 lakh): New tax regime will benefit tax payers if they don't heavily invest in tax-saving schemes.
• High-income earners (above Rs 15 lakh): These taxpayers might gain from the new regime's lower tax rates, even though it offers fewer deductions.

On Different Demographics:

• Salaried Employees: Might favor the new regime if they have minimal tax-saving investments or deductions.
• Self-Employed Individuals: Could benefit from the simplified structure of the new regime if they don't have significant business-related deductions.
• Senior Citizens: Should assess whether the benefits under the old regime, like a standard deduction, outweigh the potential advantages of the new regime’s lower tax rates.

Learn more about GST and taxation in detail

Income Tax Slab Rate For New Tax Regime (FY 2023-24)

As shown in the table, for the mentioned income slabs, the income tax rates have been revised as follows:

Why Should You Opt For New Tax Regime?

While opting for the new tax regime, you will be able to observe the following benefits over the old tax regime:

1. Simplified Tax Slabs: The new tax regime reduces the number of tax slabs, simplifying the process of determining tax liabilities. Fewer slabs mean less confusion in understanding which rate applies to different income levels, leading to easier tax calculations and planning.
2. Lower Tax Rates: Generally, the new regime proposes lower tax rates as compared to the old tax regime. This aspect could result in lower overall tax liability for many taxpayers, especially those who are in the higher income brackets and do not benefit significantly from deductions and exemptions available in the old regime.
3. No Mandatory Investments: Under the old regime, taxpayers often needed to invest in specific financial products or incur certain expenses to claim deductions. The new regime removes this requirement, offering more freedom in personal financial decisions. Taxpayers are not bound to make investments or expenditures they might not otherwise choose, just for the sake of tax benefits.
4. Ease of Filing Tax Returns: With the reduction in deductions and exemptions, the process of filing tax returns becomes less complicated. Taxpayers don't need to track and report various investments or expenditures for deduction claims, which streamlines the filing process.
5. Beneficial for Those with Fewer Deductions: The new regime can be more advantageous for individuals who do not typically engage in significant tax-saving investments or do not have substantial eligible expenses for deductions. For such taxpayers, the lower tax rates of the new regime could offer a better financial outcome than the old regime, where the benefit of deductions is not fully utilized.

When to Choose Old and New Tax Regime?

One can choose old and new tax regimes in the following cases:

Choose the old tax regime if:

1. You have significant tax-saving investments or deductions like home loan interest, health insurance premiums, and education expenses. Choose it when it surpasses the benefits of the new regime's lower tax rates.
2. You prefer having a variety of investment options for tax savings.

Opt for the new tax regime if:

1. You don’t have substantial investments or expenses that qualify for deductions.
2. You prefer a simplified tax structure with lower tax rates and don't want the hassle of tracking investments and expenditures for tax deductions.