Vivek Kaul breaks down the tax benefits and risks of the first ‘Amrit Kaal’ budget.
One thing that comes out clearly from the union budget presented earlier today is that the government wants income tax filers to abandon the old tax regime and move on to the new one.
In fact, currently, those with an income of up to Rs 5 lakh do not pay an income tax when it comes to the old tax regime or for that matter the new one. A rebate is available under both the regimes.
Nonetheless, come April 2023, those with an income of up to Rs 7 lakh won’t be paying any income tax, as long as they are followers of the new tax regime and not the old one. The rebate in the new tax regime has been increased from Rs 5 lakh to Rs 7 lakh. It stays at Rs 5 lakh under the old regime.
Hence, for anyone with an annual income of up to Rs 7 lakh, it makes sense to file their income tax return under the new tax regime. This seems like a no-brainer. The trouble is that once you have moved on to the new regime you cannot easily go back to the old one. (The only exception is in case of salaried income).
The old regime comes with its set of exemptions and deductions which aren’t allowed under the new regime. So, an employee cannot deduct their house rent allowance which he or she uses to pay rent on the home they live in, while calculating the taxable income. Other allowances like the leave travel allowance also cannot be deducted while calculating taxable income.
Further, in the case of the old tax regime, any interest paid on a home loan(s) up to a limit of Rs 2 lakh per year can be deducted while calculating taxable income. Also, under the old tax regime, any tax-saving investment under Section 80C (everything from the tax saving mutual funds to insurance premiums to tax saving fixed deposits to public provident fund, and so on), can be deducted while calculating taxable income. This is not allowed under the new tax regime.
So, while an individual earning up to Rs 7 lakh may seem to be better placed under the new tax regime, nonetheless, the question is, if they are on the old tax regime, should they move on to the new one? This is where things get tricky.
For someone whose income continues to stay up to Rs 7 lakh in the years to come, it makes immense sense to move to the new tax regime, assuming they are on the old one.
Of course, there is no way of knowing this in advance. But for people who expect to progress in life and hope that their income will be greater than the Rs 7 lakh in the years to come, it might still make sense to continue to remain in the old tax regime in order to make use of all the exemptions and deductions that are available under it as and when their income crosses Rs 7 lakh.
Indeed, the definite answer will vary from person to person and will depend on their saving habits (to make use of tax saving exemptions under Section 80 C) as well as how their salary is structured. For a salary which is high on allowances and which is likely to remain high on allowances in the years to come as an individual progresses, it still might make sense to continue being on the old tax regime, despite the current income being lower than or up to Rs 7 lakh.
However, this comes at a cost, given that those who earn up to Rs 7 lakh and continue to be on the old tax regime, will end up paying some income tax, but that will be the price paid for ensuring that the deductions and exemptions are available to them as and when their income crosses Rs 7 lakh per year. What makes the situation trickier is the fact the tax slabs in the new tax regime have been made more attractive than the old regime.
Let’s consider someone who has an income of Rs 8 lakh a year with a house rent allowance (HRA) of Rs 1,25,000, which he or she is able to completely deduct while calculating taxable income. Over and above this, tax-saving investments of Rs 50,000 are made under Section 80C. Further, Rs 25,000 of leave travel allowance (LTA) is also deducted while calculating taxable income. This implies that the taxable income in this case is Rs 6 lakh (Rs 8 lakh minus Rs 1.25 lakh of HRA minus Rs 50,000 of investments minus Rs 25,000 of LTA). The tax on this works out to Rs 32,500 (without considering any cess) under the old tax regime.
In the new tax regime in 2023-24, the tax on an income of Rs 8 lakh will work out to Rs 35,000. The individual is clearly better placed under the old tax regime. Of course this is not something that can be generalised and really depends on saving habits and the salary structure. Nonetheless, people can make basic calculations before deciding to move from the old regime to the new one. On the flip side, the new tax regime offers simplicity.
To conclude, even those whose income is up to Rs 7 lakh should think before they move on from the old tax regime to the new one. The situation is not as simple as it is being made out to be. Of course, in the years to come, given the government’s push towards the new tax regime, it might decide to dump the old tax regime and totally move to the new one. But that’s a risk worth taking.
Vivek Kaul is the author of Bad Money.
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