Choosing tax regime: How you can reduce tax burden under the New Tax Regime

New Tax Regime vs Old Tax Regime: The Centre offers us two types of tax regimes to file our income tax returns. In the budget for the financial year 2024-25, the central government introduced changes to the new tax regime, including an increase in the standard deduction by Rs 25,000 to Rs 75,000 and revisions to the tax slabs. However, the old tax regime remains unchanged, allowing taxpayers to continue benefiting from various deductions and exemptions - like deductions on loan payments, insurance premiums, tax-saving investments, tuition fees, and medical expenses. 

Under both the tax regimes, our main objective is to cut tax outgo. Here are some of the key Strategies which taxpayers can opt in order to reduce the tax burden u/s 115BAC of the IT Act:

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"During the Budget presentation, FM Sitharaman said taxpayers can save up to Rs 17,500 under new tax regime. There is even a marginal relief for income from Rs 7.5 lakh to Rs 7.78 lakh," said CA (Dr.) Suresh Surana.

As per Dr Surana, here are some key points to note:

>  Choose Between Old and New (Concessional) Regime Wisely: Taxpayers should analyse available Income & Deduction while comparing the tax payable under both regimes based on their income level and eligible deductions. Opting for the new regime if deductions and exemptions in the old regime are minimal.

> Avail the Concessional Tax Rates:  The concessional tax regime provided for relaxed tax slabs for individual taxpayers, aimed at reducing the overall tax burden, particularly for lower and middle-income groups. These revised tax rates provide significant relief by lowering the effective tax liability for individuals within these income brackets.

Tax Slabs          Tax Rates

Upto Rs. 3,00,000   Nil

Rs 3L to Rs 7L       5%

Rs 7L to Rs 10L      10%

Rs 10L to Rs 12L     15%

Rs 12L to Rs 15L     20%

Above Rs 15L        30%

Individuals opting for the new tax regime are entitled to a maximum exemption limit of Rs. 3,00,000. The benefit of increase in the basic income exemption as well as the concessional tax rates can be used by the taxpayers particularly in lower and middle income brackets to optimize their tax liabilities.

> Availability of Tax Deductions and exemptions: There are no restrictions on claiming the benefit of tax deductions and exemptions under the old tax regime. For instance, a taxpayer with investments in tax-saving instruments, who pays premiums on life or a medical insurance policy, children’s school fee, home loan principal repayment, etc., can avails the benefit of the deduction for house rent allowance, leave travel allowance etc. in the old tax regime.

However, the new tax regime permits certain specified deductions such as standard deduction on salary of Rs.75,000 u/s 16(ia), deduction for family pension being lower of Rs. 25,000 or 1/3rd of the pension, deduction pertaining to employer’s contribution to National Pension Scheme u/s 80CCD(2) of the IT Act, claiming specified deductions u/s 10(14) read with Rule 2BB etc. which the taxpayers can avail.

> Reduced Surcharge rates: Taxpayers with total income above Rs. 5 crores can avail the benefit of reduced surcharge rate of 25% (as opposed to 37% under the old tax regime) under the new tax regime thus reducing the effective tax rate from 42.744% to 39%.

> Claiming the benefit of Enhanced Threshold limit w.r.t. Rebate u/s 87A under the Concessional/ New Tax regime

Resident Individual taxpayers opting for new regime u/s 115BAC of the IT Act can claim the benefit of rebate u/s 87A of the IT Act wherein their total income does not exceed Rs. 7,00,000 for a particular tax year. The amount of rebate would be restricted to:

·       Actual amount of basic tax

·       Maximum amount of Rebate (i.e. Rs. 25,000)

> Invest in Tax-Free Income Instruments: Since most deductions (e.g., Section 80C) are unavailable under the new tax regime, taxpayers may focus on investments that are inherently tax-free such as Public Provident Fund (PPF), tax-free Bonds, etc.

> Optimising Capital Gains by claiming Section 54 series exemption

Taxpayers may avail long-term capital gains exemptions by reinvesting under Sections 54, 54F, or 54EC, which are unaffected by the regime change.
 
"It is pertinent to note that individual taxpayers can switch between old and new tax regime on a year-on-year basis whereas those individual taxpayers deriving any income from business or profession, who has exercised the option of opting out of the new tax regime u/s 115BAC could exercise the option of opting back to the said new tax regime only once. Other taxpayers can switch between old and new tax regime on a year-on-year basis. Thus, by strategically structuring one’s finances and leveraging the aforementioned benefits available under Section 115BAC, taxpayers can optimize their tax liability under the concessional tax regime," Dr Surana added.