The new tax regime, introduced in Budget 2020 and modified in Budget 2023, is a major overhaul of the income tax regime in India. It aims to simplify the tax structure, reduce the compliance burden, and provide relief to the taxpayers. However, it also comes with certain trade-offs, such as the removal of many exemptions and deductions that were available under the old regime. Therefore, it is important for the taxpayers to understand the features, benefits, and drawbacks of the new regime and make an informed choice between the two regimes.

Tax As Per New Regime

The income tax new regime offers concessional tax rates for different income slabs, ranging from 0% to 30%. The tax exemption limit has been increased to ₹3 lakhs, and the new tax slabs are as follows:

Revamped Tax Regime: More Benefits, Lower Rates

1. Income up to ₹7 lakhs gets a full tax rebate in the new tax regime.
2. ₹50,000 standard deduction for salaried individuals remains.
3. Pension deduction of ₹15,000 or 1/3rd carried over.
4. Tax-free income set at ₹7.5 lakhs.
5. Surcharge lowered from 37% to 25% on income above ₹5 crores, reducing the effective tax rate.
6. Surcharge reduction benefits high net worth individuals.
7. Non-government employees' leave encashment exemption raised from ₹3 lakhs to ₹25 lakhs (8x increase).
8. Increased limit aids retiring/resigning individuals.

Drawbacks in the New Tax Regime

However, the new income tax regime also has some drawbacks that must be considered before opting for it. They include:

1. Exemptions and deductions which can help you reduce the taxable income significantly, are not available. For example:

• House Rent Allowance (HRA)
• Leave Travel Allowance (LTA)
• Interest on housing loan
• Deductions under Chapter VI-A (such as Section 80C, 80D, 80G etc.)
• The standard deduction for self-employed professionals
• Deduction for entertainment allowance and professional tax for government employees

2. Another drawback of the new tax regime is that it does not provide any incentive for savings and investments.

Wrapping Up

The new income tax regime offers lower tax rates and higher exemption limits, but eliminates many exemptions and deductions that can reduce taxable income. Taxpayers should weigh the pros and cons of both regimes to choose the one that suits their income profile and financial goals better.

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Frequently Asked Questions

1. What is the new tax regime, and how does it differ from the previous tax system?

The new tax regime is a simplified tax system with four income tax slabs and fewer deductions and exemptions, compared to the previous tax system, which had seven income tax slabs and more deductions and exemptions.

2. What are the new tax changes and how will they affect taxpayers?

The key changes introduced in the new tax regime are the reduction in the number of income tax slabs from 7 to 4, and the removal of some deductions and exemptions.

3. How to prepare for new tax regime?

Individuals and businesses should prepare for the transition to the new tax regime by comparing their tax liability under both regimes, reviewing their deductions and exemptions, and making necessary changes in their income sources and tax-saving instruments.

4. What are the pros and cons of choosing the new tax system?

Opting for the new tax regime may lower the tax rates and simplify the tax filing, but also reduce the deductions and incentives for savings.

5. How to maximize benefits under new tax rules?

To maximise the benefits under the new tax regime, compare and choose the best regime, optimise or switch your deductions, and claim the interest, standard, and rebate benefits in the new tax regime.