Finance Minister Nirmala Sitharaman presented the Interim Budget 2024 on February 1, 2024, amid high expectations from the salaried class. However, the budget did not announce any changes in the income tax slab rates for both new and old regimes. The taxpayers have the option to choose between the new and old tax regimes as per their convenience and tax planning.
New income tax regime
The new income tax regime was introduced in the Budget 2023 with lower tax rates but without any deductions or exemptions. The new regime has seven tax slabs as follows:
- No tax for income up to Rs 2.5 lakh
- 5% tax for income between Rs 2.5 lakh to Rs 5 lakh
- 10% tax for income between Rs 5 lakh to Rs 7.5 lakh
- 15% tax for income between Rs 7.5 lakh to Rs 10 lakh
- 20% tax for income between Rs 10 lakh to Rs 12.5 lakh
- 25% tax for income between Rs 12.5 lakh to Rs 15 lakh
- 30% tax for income above Rs 15 lakh
The new regime does not allow any deductions or exemptions such as Section 80C, Section 80D, house rent allowance, standard deduction, etc. However, some exemptions such as employer’s contribution to provident fund, gratuity, leave encashment, etc., are still available.
The benefits of the new regime are:
- It offers lower tax rates for most income brackets
- It simplifies the tax filing process and reduces the compliance burden
- It encourages taxpayers to spend more and boost the economy
The new regime is beneficial for those who have low or no investments and do not claim any deductions or exemptions.
Old income tax regime
The old income tax regime has four tax slabs as follows:
- No tax for income up to Rs 2.5 lakh
- 5% tax for income between Rs 2.5 lakh to Rs 5 lakh
- 20% tax for income between Rs 5 lakh to Rs 10 lakh
- 30% tax for income above Rs 10 lakh
The old regime allows various deductions and exemptions such as Section 80C (up to Rs 1.5 lakh), Section 80D (up to Rs 25,000), house rent allowance, standard deduction (Rs 50,000), etc. The old regime also offers some tax rebates such as Section 87A (up to Rs 12,500) and Section 80TTA (up to Rs 10,000).
The benefits of the old regime are:
- It allows taxpayers to save taxes by claiming various deductions and exemptions
- It helps taxpayers in achieving their financial goals such as retirement, education, etc.
- It incentivizes taxpayers to invest more and create wealth
The old regime is beneficial for those who have high investments and claim various deductions and exemptions.
How to choose between new and old regimes?
The choice between the new and old regimes depends on the individual’s income level, investments, deductions, exemptions, and tax planning. The taxpayers should compare the tax liability under both regimes and choose the one that offers lower tax outgo and higher net income.
How to switch between regimes?
The taxpayers can switch between the regimes every year if they have no business income. To do so, they have to fill a form called Form ITR-1 or Form ITR-4 (depending on their sources of income) and select the option of either new or old regime.
However, if they have business income, they can switch from the old regime to the new regime only once. Once they opt for the new regime, they cannot go back to the old regime. To switch from the old regime to the new regime, they have to fill a form called Form ITR-3 or Form ITR-6 (depending on their type of business) and select the option of new regime.
The taxpayers should also consider the impact of switching regimes on their long-term financial goals such as retirement, education, etc. The taxpayers should consult a tax expert or use a tax calculator to make an informed decision.