New Tax Regime: What Has Changed For You?

Finance Minister Nirmala Sitharaman has announced a significant revision in the structure of the new tax regime, aimed at providing relief to taxpayers with income below ₹10 lakh per annum. These adjustments in tax slabs are designed to make the tax system more equitable and beneficial for lower and middle-income earners. Let’s delve into the details of these changes and understand their implications for taxpayers.

Revised Tax Slabs:

1. Income Range ₹3-7 Lakh:
   • Old Slab: ₹3-6 lakh taxed at 5%
   • New Slab: ₹3-7 lakh taxed at 5%
   • Benefit: Individuals with income up to ₹7 lakh will now benefit from a reduced tax rate of 5%, up from the previous ₹6 lakh limit. This adjustment increases the threshold for lower taxation, providing greater relief to individuals in this income bracket.
2. Income Range ₹6-10 Lakh:
   • Old Slab: ₹6-9 lakh taxed at 10%
   • New Slab: ₹6-10 lakh taxed at 10%
   • Benefit: The upper limit for this slab has been raised to ₹10 lakh, allowing more taxpayers to be taxed at the 10% rate instead of moving into a higher tax bracket. This change reduces the tax burden for individuals earning between ₹6 lakh and ₹10 lakh.
3. Income Range ₹10-12 Lakh:
   • Old Slab: ₹9-12 lakh taxed at 15%
   • New Slab: ₹10-12 lakh taxed at 15%
   • Benefit: The lower boundary of this slab has been adjusted to ₹10 lakh, aligning it with the revised slab above. This modification ensures that individuals with income between ₹10 lakh and ₹12 lakh are taxed at 15%, preventing a sudden jump in tax rates for those transitioning from the lower slab.
4. Income Range ₹12-15 Lakh:
   • Old Slab: Remained unchanged at 20%
   • New Slab: Remains unchanged at 20%
   • Benefit: Taxpayers in this income bracket continue to be taxed at 20%. The unchanged slab ensures that those earning between ₹12 lakh and ₹15 lakh are taxed at the same rate as before.
5. Income Above ₹15 Lakh:
   • Old Slab: Taxed at 30%
   • New Slab: Remains unchanged at 30%
   • Benefit: The highest tax rate of 30% continues to apply to incomes above ₹15 lakh. This retains the progressive nature of the tax system for higher income earners.

New Income Tax Slabs under the New Tax Regime:

Comparison with Previous Tax Slabs:

How This Compares with the Old Tax Regime:

The old tax regime remains unchanged, with those earning from ₹2.5 lakh to ₹5 lakh being taxed at 5%, those from ₹5 lakh to ₹10 lakh taxed at 20%, and those earning more than ₹10 lakh being charged at 30%. However, the old tax regime allows more deductions, in the form of house rent allowance (HRA), travel allowance, conveyance allowance, and others.

Comparison of Deductions and Exemptions:

Old vs. New Tax Regime

Explanation of Key Differences:

1. Deductions and Exemptions:
   • The old tax regime provides a variety of deductions under sections like 80C, 80D, 80TTA, and 80CCD (1B), allowing taxpayers to reduce their taxable income significantly.
   • The new tax regime simplifies the tax structure by eliminating most deductions and exemptions, offering only a standard deduction for salaried individuals and pensioners.
2. Basic Exemption Limit and Tax Rebate:
   • Under the old tax regime, the basic exemption limit varies by age, while the new regime offers a uniform exemption limit of ₹3 lakh.
   • The tax rebate under Section 87A is higher in the new regime, making it more beneficial for individuals with taxable incomes up to ₹7 lakh.
3. Income Tax Slabs:
   • The old tax regime has standard slabs with the option to claim various deductions and exemptions, leading to potential tax savings.
   • The new tax regime introduces five simplified slabs with reduced tax rates but eliminates most deductions and exemptions, aiming to streamline the tax process.
4. Surcharge and Marginal Tax Relief:
   • The new tax regime reduces the surcharge on incomes above ₹5 crore from 37% to 25%.
   • Marginal tax relief is provided in the new regime to benefit small taxpayers whose incomes slightly exceed ₹7 lakh.

Additional Benefits:

• Standard Deduction: For salaried employees, the standard deduction will be increased from ₹50,000 to ₹75,000.
• Family Pension Deduction: The deduction on family pension for pensioners will be enhanced from ₹15,000 to ₹25,000, providing relief to about four crore salaried individuals and pensioners.

Areas of Concern and Scope for Improvement:

1. Elimination of Deductions and Exemptions:
   • While the simplification of the tax regime is beneficial, the removal of various deductions and exemptions such as HRA, LTA, and Section 80C may not be favorable for all taxpayers. These deductions often provide significant tax savings, especially for those with substantial investments in specified instruments or higher housing costs.
2. Marginal Tax Relief Complexity:
   • The provision of marginal tax relief for small taxpayers with incomes slightly exceeding ₹7 lakh, while beneficial, can add complexity. Clear guidelines and easy-to-understand mechanisms are necessary to ensure taxpayers can fully benefit from this relief without confusion.
3. Limited Benefits for Higher Income Groups:
   • The new regime does not provide much relief for individuals earning between ₹12 lakh and ₹15 lakh, as their tax rate remains unchanged. Additionally, high earners above ₹15 lakh continue to face a 30% tax rate, which might be perceived as high, especially in the absence of deductions.
4. Impact on Savings and Investments:
   • By eliminating deductions under Section 80C and other sections, the new tax regime could potentially discourage savings and investments in tax-saving instruments such as PPF, NSC, and ELSS. These instruments not only provide tax benefits but also encourage long-term financial planning and stability.
5. Revenue Considerations:
   • The net revenue forgone annually is estimated at approximately ₹7,000 crore. While this may provide relief to taxpayers, it could also impact government revenue and funding for public welfare programs. Balancing tax relief with fiscal responsibility is crucial.

Conclusion:

The revised tax slabs under the new tax regime reflect a significant effort by the government to simplify the tax system and provide relief to lower and middle-income earners. By raising the thresholds and adjusting the tax rates, the government aims to make the tax structure more equitable. While the new regime eliminates many deductions and exemptions, it offers a more streamlined approach, potentially reducing the complexity of tax filings. However, it is essential to address the concerns related to the elimination of deductions, the impact on savings and investments, and the need for more equitable relief across all income brackets. By making thoughtful adjustments and ensuring clear communication, the government can enhance the effectiveness of the new tax regime and ensure it benefits a broader spectrum of taxpayers while maintaining fiscal responsibility.