1st February 2023 was a momentous day for taxpayers in India. The Finance Minister of India, Smt. Nirmala Sitharaman announced the new income tax regime, which had not changed since 2014.
The regime tax gives salaried employees the choice to opt for the new or old tax regime slab. A salaried individual must inform their employer of their preferred tax regime. Otherwise, their employer will collect Tax Deducted at Source (TDS) from wages based on the new tax rate. This is excluding the many exemptions and deductions that were available as part of the old income tax regime.
To opt for the income tax regime beneficial for you, you should understand the features and benefits of the new tax regime and the way it will impact your finances.
The income tax slabs have been revised by the finance ministry in the new union budget. According to the new income tax regime, an annual income up to ₹3 lakh is non-taxable. Also, an individual earning a total annual income of up to ₹7 lakh enjoys tax exemption. The Section 87A deduction cap has been raised from ₹5 lakh to ₹7 lakh. The new regime offers five tax slabs to people as opposed to six tax slabs in the old one. The basic tax exemption limit is also increased to ₹3 lakh from ₹2 lakh.
The upper tax slab in the new regime is ₹15 lakh and above. The income tax rate for this tax slab is 30%.
The lower tax slab for senior citizen tax is ₹3 lakh.
Some important exemptions and deductions offered in the new income tax regime are as follows:
1) Standard deduction: This is a deduction available for pensioners and salaried individuals. ₹50,000 can be claimed as a standard tax deduction from their pension/salary income. An employer will automatically account for the standard deduction when calculating income tax.
2) National Pension System (NPS) contribution: A salaried individual whose employer makes an NPS contribution can claim a tax exemption under the Income Tax Act Section 80CCD(2). When it comes to a government employee, the income tax deduction limit is 14% of the salary. For private employees, the highest tax deduction that can be made is 10% of the salary.
3) Donations to Agniveer Corpus Fund: Under section 80CCH, contribution to the Agniveer Corpus Fund is eligible for deduction.
4) Home loan: Deduction is available for the interest of the home loan taken for rental house property.
5) Health insurance: Taxpayers can use section 80D to claim a ₹25,000 deduction if they have paid medical insurance premiums for themselves, their spouse and any dependent children. For senior citizens, the exemption limit is ₹50,000.
6) Leave encashment: The exemption limit for leave encashment during retirement or resignation is changed from ₹3 lakh to ₹25 lakh in the new tax regime.
An income tax calculator can be used to easily calculate your total tax and tax liability. The new regime has done away with many exemptions and deductions, like interest on house property loans. So, using a tax calculator can help you easily identify your tax liability and savings. It can also help you calculate tax returns.
Having to make a choice between two tax regimes can feel like a huge task. However, having an idea about the benefits of the new tax regime and the exemptions available will help you opt for the one suited for you. You can easily grasp your finances with Fi Money. Open a savings account with no balance and use Ask Fi, an easy-to-use personal finance assistant, to get all your financial questions answered.
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Based on the new tax regime, a person earning ₹15 lakh needs to pay ₹1.5 lakh, as opposed to ₹1.87 lakh. However, it may be more advantageous if the person is qualified to claim HRA, PPF, or similar deductions under the old regime.
Under the new regime, you are exempt from paying income tax if your annual income is up to ₹7.5 lakh. So, the new tax regime may be beneficial for someone earning less than 5 lakh per annum.
Choose a tax regime depending on your income level and the deductions you are eligible for. This will help you save money.