New vs old income tax regime: Here is how to make an informed choice

The basic exemption limit has been increased from ₹2.5 lakh to ₹3 lakh in the new regime.

The tax slabs in new regime have also been relaxed a bit now: upto ₹3 lakh – nil tax; ₹3 lakh to ₹6 lakh – 5%; ₹6 lakh to ₹9 lakh– 10%; ₹9 lakh to 12 lakh – 15%; ₹12 lakh to ₹15 lakh – 20% and above ₹15 lakh – 30%.

The available limit of rebate under section 87A has also been increased from ₹5 lakh to ₹7 lakh in the new personal regime. At the above newly prescribed slab rates, the new rebate limit under section 87A is ₹25,000 on the exempt income of ₹7 lakh, as compared to existing rebate limit of ₹12500 on the exempt income of ₹5 lakh.

Thus, individuals and Hindu undivided families (HUFs) opting for the new regime in FY 2023-24 and onwards, and having gross total annual income of up to ₹7 lakh, will not be required to pay any income tax.

The increase in the basic exemption limit and in the rebate limit under section 87A have been prescribed only for the new tax regime under section 115BAC and not in the old personal tax regime of higher tax rates with availability of specified deductions.

Another very significant and welcome relief which has been proposed in the Finance Bill 2023 is the allowability of Standard Deduction under section 16(ia) and the deduction in respect of family pension under section 57(iia), if applicable, to the salaried individuals, in the new personal tax regime under section 115BAC(1A) of the income tax Act.

The existing surcharge rate for high net worth individuals (HNIs), with annual incomes of above ₹5 crore, has been reduced from 37% to 25% in the new personal tax regime and, consequently, the effective tax rate will reduce from 42.74% to 39%.

For individuals and HUFs having taxable annual incomes of up to ₹7 lakh and above ₹5 crore, respectively, the choice of going in for the new regime is very clear.

However, for those earning in between ₹7 lakh and ₹5 crore, as per the numbers arrived at based on the break-even point analysis, all individuals having their annual taxable incomes above ₹15 lakh should consider continuing with the old regime, only, if their available deductions, other than standard deduction of ₹50,000 under section 16, viz. deductions available under sections 80C/80D/24(b)/house rent allowance (HRA), etc., exceeds ₹3.75 lakh in a year.

But, if such available deductions are equal to or less than ₹3.75 lakh in a year, or if they don’t want to block their disposable funds in making such investments of ₹3.75 lakh, then they should definitely switch to the new regime to reduce their income tax liability.

Those individuals earning an annual income of ₹10 lakh should consider continuing with the old regime only if their available deductions other than standard deduction exceed ₹2.5 lakh in a year, otherwise they should switch to the new regime.

Also, for individuals earning annual income of ₹12.5 lakh, the break-even figure of available deductions other than standard deduction comes out at ₹3.12 lakh and for annual income of ₹15 lakh this figure of deduction, other than standard deduction, works out to ₹3.58 lakh.

One more important thing. In the budget, the double deduction in respect of home loan principal repayments and interest first under section 80C/24(b) and subsequently again as cost of acquisition under section 48, while computing capital gains on sale of such house property, has been prohibited.

So, as a natural corollary, if one’s home loans’ principal and interest payments in equated monthly installments (EMIs )constitute a sizeable chunk of available deductions, and if one intends to sell off the house in future, then such an individual may also consider forgoing the deduction in respect of home loan principal repayments under section 80C and interest under section 24(b) available presently, and conveniently opt for the new regime.

This will help one claim the same as cost of acquisition or cost of improvement in respect of such house property in computing the capital gains, at the time of its sale.

Mayank Mohanka is founder of TaxAaram India and partner, S M Mohanka & Associates