How to choose between the old and new income tax regimes? What deductions and exemptions can one avail?

Question: How to choose between the old and new tax regimes? What deductions and exemptions can one avail in both regimes?

Sumit, Bengaluru

Reply by: Yeeshu Sehgal, Head of Tax Market, AKM Global, a tax and consulting firm answer: 

To determine which tax regime will be best suitable for a person depends upon the exemptions and deductions available in both the tax regimes which can be determined with the help of break-even point, i.e., the maximum deduction a taxpayer can avail in the old regime to break-even with the reduced tax liability in new tax regime in such a way that tax payable under both regimes will be same. 

Taxpayers can switch between the two tax regimes every financial year, however,  this relaxation is not available to taxpayers having business income, wherein the option once chosen will apply to subsequent financial years. As per the Finance Act’2023, the new tax regime shall be the default tax regime. There are several changes to the new regime which have been done such as increased rebate has been allowed on income up to Rs 7 lakhs along with marginal relief available in the new tax regime. 

There are six income slabs now in the new regime with the increased basic exemption limit to INR 3 lakhs from the previous limit of INR 2.5 lakhs. In addition, the maximum rate of surcharge is 25 per cent in the new tax regime, whereas the maximum surcharge rate under the old regime was 37 per cent.

The taxpayers under the new regime have to forgo exemptions if they opt for new tax regime such as Leave Travel Allowance, House Rent Allowance, Children Education Allowance, Deduction for professional tax, Interest on housing loan and deductions on specified investments, etc. 

However, interest paid on a housing loan taken for a rented-out property can be claimed as a deduction under section 24(b) in the new tax regime as well. The new regime seems to be more beneficial for the taxpayers with lower tax slabs.

Additional tax deduction  u/s 80CCD (2) of Income-tax act is available to salaried taxpayers in a private sector which is restricted to Employer's NPS contribution (for the benefit of employee) up to 10% of salary (Basic + DA). In other words, this is deductible from the employees income upto 10% of salary(Basic+DA). Exemptions and deductions available under the new tax regime other than interest on let out  property u/s 24(b) and NPS contribution u/s 80CCD(2) includes  exemption on voluntary retirement, exemption on gratuity, exemption on leave encashment

Taxpayers would now need to evaluate their tax liability under both the tax regimes and then decide accordingly.

(Views expressed by the tax/investment expert are his/her own.)

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