Breaking Down the Old vs New Personal Tax Regime – What You Need to Know

Table of Contents

1. New Personal Tax Regime: Backdrop
2. Budget Amendments in New Personal Tax Regime
3. Deductions allowable in New Personal Tax Regime
4. Deductions allowable only in Old Personal Tax Regime
5. New Tax Regime to be the Default Regime
6. New vs Old Regime: Comparison between Slab Rates
7. New vs Old Regime: Break Even Point Analysis
8. New vs Old Regime: Empirical Findings
9. New vs Old Regime: Tip for Home Loan Takers
10. New vs Old Regime: Practical Case Studies
11. Presumptive Taxation u/s 44AD/44ADA: New vs Old Regime
12. New vs Old Regime: Income Tax Calculator
13. Reference Articles

1. New Personal Tax Regime: Backdrop

• With a view to simplify the complex maze of plethora of deduction claims of the individual & HUF taxpayers, Government introduced the New Personal Tax regime w.e.f. FY 2020-21 and onwards with reduced tax rates u/s 115BAC
• The compulsory requirement of foregoing of the majority of the available specified deductions by the individuals and HUFs opting for the new personal tax regime made the said new regime unpopular and with a very few takers
• The Government wanted more and more taxpayers to switch to the new regime, to reduce the complexities in return filing and assessments arising out of the plethora of deduction claims of the assessees applicable in the old regime
• In order to make the new regime more appealing to the taxpayers, some significant amendments in the new personal tax regime u/s 115BAC, have been proposed in the Finance Bill 2023

2. Budget Amendments in New Personal Tax Regime

• New Personal Tax Regime u/s 115BAC(1A) to be the DefaultRegime
• Basic Exemption Limit increased from Rs 2.5 lakhs to Rs 3 lakhs in new regime
• Tax slabs in New personal tax regime revamped
• New revamped slab rates are: upto 3,00,000 – Nil Tax; 3,00,001 to 6,00,000 – 5%; 6,00,001 to 9,00,000– 10%; 9,00,001 to 12,00,000 – 15%; 12,00,001 to 15,00,000 – 20% and above 15,00,000 – 30%.
• Threshold income limit for rebate u/s 87A increased from Rs. 5 lakhs to Rs. 7 lakhs. At the above newly prescribed slab rates, the new rebate limit u/s 87A comes out Rs. 25,000 on the exempt income of Rs 7 lakhs, as compared to existing rebate limit of Rs 12,500 on the exempt income of Rs 5 lakhs
• Standard Deduction u/s 16(ia) of Rs. 50,000, now allowable in new personal tax regime, as well
• Deduction in respect of family pension u/s 57(iia), upto Rs. 15,000, allowable in new personal tax regime, as well
• Surcharge rate for HNIs, having annual incomes exceeding Rs. 5 crores, reduced from 37% to 25%, so their effective tax rate will reduce from 42.74% to 39%
• New Personal Tax Regime can be opted by AOP, BOI & Artificial Juridical Person, as well
• All the above amendments will become effective from FY 2023-24 (AY 2024-25) and onwards

3. Deductions allowable in New Personal Tax Regime

• Standard Deduction of Rs. 50,000 u/s 16(ia) to salaried individuals & pensioners
• Deduction in respect of family pension u/s 57(iia), upto Rs. 15,000
• Deduction in respect of contribution to Agniveer Corpus Fund under the newly inserted section 80CCH(2)
• Deduction in respect of Employer’s Contribution to National Pension Scheme (NPS) u/s80CCD(2) to the extent of 10% of basic salary and dearness allowance in case of private sector employee & 14% in case of government employee
• Transport allowance u/s 10(14) in case of a specially-abled person
• Conveyance allowance u/s 10(14) received to meet the conveyance expenditure incurred as part of the employment
• Daily allowance u/s 10(14) received to meet the ordinary regular charges or expenditure you incur on account of absence from his regular place of duty
• Exemption on Voluntary Retirement 10(10C), Gratuity u/s 10(10) and Leave encashment u/s 10(10AA)
• Interest on Home Loan on let-out property (Section24)
• Deduction in respect of additional employee cost (Section80JJAA)

4. Deductions allowable only in Old Personal Tax Regime

• House Rent Allowance u/s10(13A)
• Leave Travel Concession u/s10(5)
• Interest on housing loan in respect of self occupied or vacant property u/s24(b)
• Helper Allowance u/s10(14)
• Children Education Allowance
• Chapter VIA Deductions u/s 80C like LIC, ULIPs, PPF; NPS Contribution u/s80CCD(1)/(1B)
• Deduction in respect of Mediclaim Premium u/s 80D
• Deduction in respect of Interest paid on education loan u/s 80E
• Deduction in respect of Donation u/s 80G
• Deduction in respect of Royalty income of Authors on Books u/s 80QQB
• Deduction in respect of Interest Income on Savings Bank account u/s 80TTA
• Deduction in respect of Interest Income on deposits with Post Office, Banks u/s 80TTB
• Additional Depreciation u/s32(1)(iia)

5. New Tax Regime to be the Default Regime

• Uptill FY 2022-23 (AY 2023-24), the Old Personal Tax Regime is the Default Regime and the Taxpayers opting for the New regime and having their income under the head ‘Profits from Business or Profession’ are required to file an electronic declaration in prescribed Form 10IE, before the due date of filing their ITRs
• W.e.f. FY 2023-24 (AY 2024-25), the New Personal Tax Regime u/s 115BAC(1A), will become the Default Regime
• Persons having their income under the head ‘Profits from Business or Profession’ and wantingto benefit from the specified deductions available only under the Old regime, are now required to exercise their option of filing their ITRs under the Old Regime by filing an electronic declaration in the prescribed form u/s 115BAC(6), before filing of their ITRs
• Such persons shall be able to exercise the option of opting back to the new regime u/s 115BAC(1A) only once
• Persons not having income from business or profession shall be able to exercise the option of furnishing their ITRs as per the Old regime, in each year, by selecting the option of old regime in their ITR Forms
• The salaried individuals will be required to submit their investment declaration forms to their employers at the beginning of the financial year only, if they wish to opt for the old regime, in order to enable their employers to deduct accurate TDS on their salaries, after giving the benefit of deductions claimed

6. New vs Old Regime: Comparison between Slab Rates

The comparison between the tax slab rates in the two personal tax regimes is tabulated as under, for ready reference of all

7. New vs Old Regime: Break Even Point Analysis

• For individuals and HUFs having taxable annual incomes of upto Rs 7 lakhs and above Rs 5 crores, respectively, the choice of going in for the new regime is very clear.
• However, for those earning annual incomes in between 7 lakhs to 5 crores, the figures of available deductions which are required to be claimed in the old regime to break-even with the reduced tax liability in the new regime are tabulated below:

8. New vs Old Regime: Empirical Findings

• As per the numbers arrived at based on the break-even point analysis, all taxpayers having their annual taxable incomes above Rs 15 lakhs should consider continuing with the old personal tax regime, only, if their available deductions are greater than Rs. 4,25,000 in a year.
• But, if such available deductions are equal to or less than Rs 4,25,000 in a year, or if they don’t want to block their disposable funds in making such investments of Rs 4,25,000, then they should definitely switch to the new regime to reduce their income tax liability.
• Those taxpayers earning an annual income of Rs 10,00,000 should consider continuing with the old regime only, if their available deductions exceed Rs 3,00,000 in a year, otherwise they should switch to the new regime.
• Those taxpayers earning an annual income of Rs 12,00,000 should consider continuing with the old regime only, if their available deductions exceed Rs 3,50,000 in a year, otherwise they should switch to the new regime.
• Also, for individuals earning annual income of Rs 12,50,000 the break-even figure of available deductions comes out at Rs. 3,62,500 and for annual income of Rs 15,00,000 this figure of available deduction works out at Rs. 4,08,333.

9. New vs Old Regime: Tip for Home Loan Takers

• One more important observation. In the Budget, the double deduction in respect of home loan principal repayments and interest first u/s 80C/24(b) and subsequently again as cost of acquisition u/s 48, while computing capital gains on sale of such house property, has been plugged and prohibited.
• So, as a natural corollary, if one’s home loans’ principal and interest EMIs constitute a sizeable chunk of available deductions, and if one intends to sell-off the house in future, then one may also consider forgoing the deduction in respect of home loan principal repayments u/s 80C and interest u/s 24(b) presently, and conveniently opt for the new regime.
• This will help one claim the same as cost of acquisition or cost of improvement in respect of such house property in computing the capital gains, at the time of its sale. Even the benefit of indexation may also be availed on such amounts then.

10. New vs Old Regime: Practical Case Studies

Practical Case Study 1

Practical Case Study 2

Practical Case Study 3

Practical Case Study 4

Practical Case Study 5

11. Presumptive Taxation u/s 44AD/44ADA: New vs Old Regime

• The threshold limit for presumptive taxation scheme in respect of small business u/s 44AD has been increased from Rs 2 crores to Rs 3 crores, and in respect of professionals u/s 44ADA has been increased from Rs 50 lakhs to Rs 75 lakhs, w.e.f. FY 2023-24 and onwards
• These increased limits are subject to the mandatory condition that respective cash receipts from such small businesses or professions, must not exceed 5% of their total receipts from such business or profession
• In the presumptive taxation scheme u/s 44AD, the proprietor businessman declares the income at 6%/8% of the total turnover, on presumptive basis, without claiming any business expenditure
• In the presumptive taxation scheme u/s 44ADA, the proprietor professional declares the income at 50% of the total turnover, on presumptive basis, without claiming any business expenditure
• Chapter VIA deductions are available in presumptive income schemes u/s 44AD/44ADA. In terms of tax slab rates, the new regime u/s 115BAC(1A) is naturally the clear choice. However, if the taxpayers opting for presumptive income scheme, also have Chapter VIA deductions like 80C/80D/Interest on Home Loan for self occupied property etc. then the break-even point analysis done by us in previous slide, will help in the choice between the Old and New regime

12. New vs Old Regime: Income Tax Calculator

• The Income Tax Department has launched a Tax Calculator for the Taxpayers in order to assist them in choosing wisely between the Old and the New Personal Tax Regime.
• The link for the said Tax Calculator is: https://incometaxindia.gov.in/Pages/tools/115bac-tax-calculator-finance-bill-2023.aspx

13. Reference Articles

• The Tale of Dhani Ram, Mani Ram, Buni Ram, Gyani Ram & the Personal Tax related Budget Amendments: https://www.taxmann.com/budget/budget- story/488/the-tale-of-dhani-ram-mani-ram-buni-ram-gyani-ram–the-personal- tax-related-budget-amendments
• Which Personal Tax Regime is More Beneficial? An In-depth Break-Even Point Analysis: https://www.taxmann.com/budget/budget-story/457/which-personal- tax-regime-is-more-beneficial-now-an-in-depth-break-even-point-analysis