India has recently witnessed the introduction of a new tax regime, which has proven to be a significant move toward economic reform. This change has far-reaching effects on individuals, businesses, and the overall economic terrain of the country. The launch of the new tax regime has introduced revised tax slabs and rates, aiming to simplify the tax structure and reduce the load on specific income brackets. This revised tax slab highlights the importance of carefully evaluating which regime aligns with one’s financial conditions.
The taxation system of India has undergone a significant change with the advent of the new tax regime. Let’s explore the new tax regime in India, its key aspects, implications, and how to navigate through the changes.
Understanding the Foundations of the New Tax Regime
- Background and Rationale: The government’s commitment to simplify the existing tax structure and promote economic growth has given rise to a new tax regime. The new system aims to reduce the compliance burden on taxpayers while nurturing a more transparent and efficient tax administration.
- Optional Nature of the New Tax Regime: One can choose between the old tax regime, which offers exemptions and deductions, or the new tax regime, with lower tax rates and exemption benefits. With such flexibility, individuals and businesses can align their tax strategies with their financial goals.
Key Highlights of the New Tax Regime
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Revised Tax Slabs
The new tax regime offers the benefit of a lower tax rate for different income brackets. It can lead to reduced tax liabilities for many individuals, but it is essential to evaluate the impact of preceding exemptions and deductions. Additionally, there are several deductions, such as 80C and HRA, that cannot be claimed under the new tax regime.
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Exemptions and Deductions of the New Tax Regime
In the old tax regime, individuals were able to avail themselves of various exemptions and deductions, including House Rent Allowance (HRA), standard deductions, and deductions eligible under Section 80C. All these benefits are eliminated under the revised tax regime and replaced with lower tax rates. Taxpayers must evaluate the pros and cons of each regime based on their financial circumstances. Certain deductions and exemptions falling under the new tax regime are given as follows:
- Conveyance allowance
- Exemptions for Voluntary Retirement Scheme under section 10(10C)
- Interest on a home loan on lent-out property under Section 24
- The payments made to health insurance premiums of oneself, spouse, parents, or dependent children are eligible for deductions under section 80D.
- Gifts of up to Rs. 5,000
- Tour or transfer compensations
- Gratuity amount under Section 10
- Leave encashment under Section 10(10AA)
- Transport allowance with respect to Persons with Disabilities (PwD)
- Investments made in the Notified Pension Scheme under Section 80CCD(2)
- Deductions under section 80JJAA for new employees
New Tax Regime and Old Tax Regime
Mentioned below is a comparison between the deductions and exemptions available under the new and the old tax regime:
| Particulars | Old Tax Regime | New Tax Regime |
| Income Level for Rebate Eligibility | ₹ 5 Lakhs | 7 Lakhs |
| Standard Deduction | ₹ 50,000 | ₹ 50,000 |
| Effective Tax-Free Salary Income | ₹ 5.5 lakhs | ₹ 7.5 lakhs |
| Rebate u/s 87A | ₹12,500 | ₹25,000 |
| HRA Exemption | Yes | No |
| Standard Deduction (Rs 50,000) | Yes | Yes |
| Interest on Home Loan u/s 24b on Self-occupied or vacant property | Yes | No |
| Employee’s (own) contribution to NPS | Yes | No |
Impact on Businesses
There has been a change in the corporate tax rates for businesses. They need to assess the overall impact of the new corporate tax rates, considering the trade-off between the loss of specific exemptions and reduced tax rates. Some of the deductions and exemptions for businesses are:
- Businesses processing, preserving, and packaging fruits, vegetables, meat, poultry, dairy, and marine products are eligible for deductions under Section 80IB.
- Integrated businesses of handling, storage, and transportation of food grains also come under Section 80IB.
- Indian companies with Scientific and Industrial Research and Development as their primary object and approved by prescribed authority can claim deductions under Section 80IB.
- Businesses that collect and process biodegradable waste can also claim deductions under Section 80JJA with respect to profits and gains.
- Deductions can be claimed under Section 80IBA on developing and building housing projects.
Future Outlook and Adaptability of the New Tax Regime
Understanding the new tax regime can be overwhelming initially. Still, you can take the help of various tax management tools and professionals to evaluate its benefits carefully. Employers can educate employees on tax rate changes and help them choose between the old and new tax regimes. The new tax regime is set as default if not opted between the two.
Individuals can opt for health insurance and higher education loans if required to avail of deductions under Sections 80D/ 80E that are eligible under the new tax regime. Taxpayers can look for these options to reduce their taxable income and enjoy a smooth transition from the old regime to the new tax regime.