The Indian government collects income tax to fund developmental activities and provide public services. The income tax system in India has undergone several changes in recent years, with the introduction of a new income tax slab aimed at providing relief to taxpayers. This new slab has a lower tax rate and applies to individuals earning between Rs.5 Lakh and Rs.15 Lakh per annum.
The introduction of the new income tax slab for FY 2024-25 has been widely welcomed by taxpayers as it has led to a reduction in the tax amount payable for many individuals. However, taxpayers must carefully consider whether they are better off under the old or new tax regime, as the choice between the two depends on several factors such as income level, deductions, and exemptions.
New Tax Regime for FY 2024-25
The Indian income tax system underwent recent changes with the introduction of a new regime that offers lower tax rates but eliminates several deductions and exemptions. This change provides taxpayers with the option to choose between the old and new tax structures based on whichever is more beneficial for them.
The new income tax regime is designed to provide relief to taxpayers and simplify the tax structure, but it is important for individuals to evaluate their options carefully. Factors such as income level, deductions, and exemptions must be taken into account to make an informed decision and minimise tax deductions.
If a taxpayer earns Rs.12 Lakh, they have the option to choose the new tax regime and determine their tax liability by referring to the following breakdown:
| Income | Income tax Rate |
|---|---|
| Up to Rs.3,00,000 | NIL |
| From Rs.3,00,001 to Rs.6,00,000 | 5% |
| From Rs.6,00,001 to Rs.9,00,000 | 10% |
| From Rs.9,00,001 to Rs.12,00,000 | 15% |
| From Rs.12,00,001 to Rs.15,00,000 | 20% |
| Above Rs.15,00,000 | 30% |
The tax liability for an income of Rs.12 Lakh, based on the tax slabs mentioned above, is Rs.2,40,000. It is important to note that this tax liability is only valid for taxpayers who choose to forego exemptions and deductions like HRA, LTA, and medical bills under the new regime.
The Old Tax Regime
The old income tax regime was the previous tax system in India, which has now been replaced by the new income tax regime. Under this old system, taxpayers were charged tax on their total income at a fixed rate, based on their income bracket. The tax rates varied across different income slabs, with the tax rate increasing as the income increased. Additionally, taxpayers were allowed to claim various deductions and exemptions to reduce their taxable income and lower their tax liability.
| Income | Income tax Rate |
|---|---|
| Up to Rs.2.5 Lakhs | NIL |
| From Rs.2,50,000 – Rs.5,00,000 | 5% |
| From Rs.5,00,000 – Rs.7,50,000 | 20% |
| From Rs.7,50,000 – Rs.10,00,000 | 20% |
| From Rs.10,00,000 – Rs.12,50,000 | 30% |
| From Rs.12,50,000 – Rs.15,00,000 | 30% |
| Rs.15,00,000 & above | 30% |
Choose Old or New Tax Regime for Earning on 12 Lakhs
When it comes to tax planning, understanding the implications of the different income tax slabs is important. With the introduction of a new tax regime in India, taxpayers now have the option to choose between the old and the new regime. However, before deciding which tax regime is better for an income of 12 lakhs, it's important to consider other factors, such as home loan tax benefits.
Under the old tax regime, taxpayers can avail of several deductions and exemptions, such as home loan tax benefits, which can help lower their taxable income. Home loan tax benefits can include deductions for the principal amount, interest paid, and stamp duty and registration charges. Furthermore, taxpayers can also claim a deduction of up to Rs. 1.5 lakhs on the principal amount under Section 80C of the Income tax Act.
To determine whether the old or new tax regime is better for an income of 12 lakhs, taxpayers can use an income tax calculator to compare their tax liability under both regimes. It's also important to consider factors such as the home loan interest rate and the home loan EMI, as these can affect the taxpayer's cash flow and overall financial planning. Ultimately, the decision to choose between the old and new tax regime depends on the taxpayer's individual financial situation and long-term financial goals.
Pros and Cons of New Regime
With the announcement of the new income tax slab in Budget 2023, taxpayers are presented with an appealing yet complex decision. The government's intention is for a large proportion of taxpayers to choose the new regime, but before doing so, it is important to weigh the pros and cons.
Pros:
- Currently, taxpayers have the flexibility to choose the scheme that is most beneficial to them. This implies that both the old and new tax regimes are still available as options for taxpayers. The good news is that the government has not mandated the switch to the new tax regime.
- Under the new tax regime, taxpayers have the freedom to invest their money as they see fit, without any obligation to invest in specific tax-saving schemes and insurance plans that may not align with their financial goals. This allows for more flexibility in investments, as they are not restricted to only tax-saving schemes and insurance plans.
- The new tax regime has a simplified structure consisting of six tax slabs which makes it easier for taxpayers to calculate their taxes.
- The new tax regime has lower tax rates compared to the old regime, leading to a decrease in the tax liability for taxpayers.
Cons:
- New regime allows for more flexibility in investment, but younger generations may lack investment knowledge and the new regime may lead to lower long-term savings. The old regime was better at encouraging saving habits and passive income, while the new regime lacks such automatic mechanisms.
- Certain types of losses cannot be adjusted against current year's income and are not allowed to be carried forward, such as loss from property and unabsorbed depreciation from previous years.
- Flexibility is limited as taxpayers who opt for the new regime cannot switch back to the old regime.
*Terms and conditions apply.
Frequently Asked Questions
Taxpayers can avail some deductions and exemptions under the new tax regime, including standard deduction, rent paid deduction, and donations made to charitable organisations. However, the new regime does not allow exemptions such as HRA, LTA, and medical bills.
It varies depending on the taxpayer's investment choices, tax-saving strategies, and financial goals. Taxpayers with significant deductions and tax-saving investments may find the old tax regime more beneficial, while those with minimal deductions may benefit from the new regime's rates. It is suggested to use an income tax calculator before making a decision.
A better tax regime for Rs.15 Lakh depends on factors like financial goals and investment preferences. If there are significant tax-saving investments and deductions, the old regime can be better. Otherwise, the new regime's tax rates may be more beneficial. It is advisable to use an income tax calculator before taking this decision.
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