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Tax exemptions will go away

Who should adopt the new Income Tax regime

Ask individual taxpayers what is more painful than paying taxes?

Chances are that most of them will say: filing the tax return with all the deductions.

The tax return forms have been simplified, but more needs to be done.

This is part of the Direct Tax Code which will eventually replace the Income Tax Act 1961.

Why was the Direct Tax Code introduced?

The most important reason for scrapping the Income Tax Act is that it is complex and is not in keeping with the current business and economic conditions.

It has nearly 700 sections and way too many sub-sections.

The primary goal of the tax code was to simplify the tax system and alleviate the compliance burden for taxpayers.

The government aimed to provide taxpayers with a choice between lower tax rates with fewer deductions or higher tax rates with more deductions.

Additionally, the new tax regime intended to stimulate consumption and investment by leaving more money in taxpayers' hands.

The government hopes this would spur economic growth and job creation.

What is the new income tax structure introduced in 2023?

A start to simplify the income tax regime was made in Budget 2020, which offered lower tax rates while removing numerous exemptions and deductions.

However, this regime gained little traction as most taxpayers chose to stick with the old regime and claim their deductions.

In Budget 2023, the government made significant changes to encourage more taxpayers to adopt the new regime.

These changes include:

Higher tax rebate limit of Rs 7 lakhs for resident individuals
Streamlined tax slabs with reduced tax rates for specific income brackets
Standard deduction of Rs 50,000 for salaried individuals and family pensioners
Reduced surcharge rate of 25% for high net worth individuals earning over Rs 5 crores
Higher leave encashment exemption of Rs 25 lakhs for non-government employees

These alterations have made the new tax regime more appealing and beneficial for many taxpayers.

But is it superior to the old regime?

It depends on what you have in mind and your outlook. The new tax regime has some pros and cons.

Pros

The new tax regime offers advantages over the old regime, such as:

Lower tax rates for most income brackets, particularly those earning between Rs 5 lakhs and Rs 15 lakhs
Higher tax-free income limit of Rs 7.5 lakhs (including standard deduction) for resident individuals
No need to maintain proof and documentation for claiming deductions and exemptions
No mandatory investment in tax-saving instruments
Increased flexibility and convenience in filing tax returns

Cons

The new tax regime also has some disadvantages compared to the old regime, including:

Loss of many popular deductions and exemptions, like Housing Rent Allowance, Leave Travel Allowance, deductions under 80C, 80D, etc.
Loss of benefits from tax-saving schemes, such as Equity Linked Savings Scheme, Public Provident Fund, National Pension Scheme etc.
Loss of set-off and carry forward of losses from house property
Higher tax liability for those earning above Rs 15 lakhs or with high deductions

Who should adopt the new tax regime?

The choice between the old and new tax regimes depends on your income level, deductions, and preferences.

There isn't a one-size-fits-all solution.

Compare your tax liability under both regimes and choose the one that best suits you.

You may consider opting for the new tax regime if:

Your income is below Rs 7 lakhs or between Rs 5 lakhs and Rs 15 lakhs
You don't have many deductions or exemptions
You don't want to invest in tax-saving instruments or lock in your money long-term
You prefer simplicity and convenience over saving taxes

You consider sticking with the old tax regime if:

Your income is above Rs 15 lakhs or below Rs 5 lakhs
You have many deductions or exemptions
You want to invest in tax-saving instruments or save taxes for long-term goals
You don't mind maintaining proofs and documents for claiming deductions

India's new income tax regime is a significant reform that gives taxpayers a choice between lower taxes with fewer deductions or higher taxes with more deductions.

Use a reliable online calculator or consult a professional tax advisor to compare your tax liability under both regimes.

Individuals with income sources other than business and profession can change their taxation preference between the old and new tax regimes yearly.

To exercise this option, you must choose your desired tax regime when filing your income tax return. You can change your preference annually if your income tax return is filed within the stipulated due date.

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