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India’s tax regime changes in 2024

May 15, 2024

April 1st is the start of a new financial year in India, and changes to their tax regime for 2024 under the income tax act are now in effect. That means employees need to decide which tax regime is best for them: the old income tax regime or the new income tax regime.

The new 2024 tax regime for India includes changes to deductions, tax rates, and exemptions, and can affect both employee finances and their financial planning. Indian residents need to understand the differences between each tax scheme to make the right decision for their financial situation, and ensure compliance with the new regulations.

In this post, we’ll explore the changes and what they mean for employees in India.

Changes in Income Tax Structure

When the new tax regime went into effect on April 1, they became the default tax regime selection. Individual taxpayers are free to choose to use the old regime if they wish. However, it’s a good idea to fully understand the changes before making a decision.

At a high level, the changes are:

  • The basic exemption limit has been raised to Rs 3 lakh (up from Rs 2.5 lakh).
  • Income tax slabs have changed.
  • Salaried employees and pensioners now have a Rs 50,000 lakh standard deduction.
  • Under section 87A, the tax rebate has been increased for taxable incomes that don’t exceed Rs 7 lakhs. If your income is less than Rs 7 lakhs, you don’t have to pay taxes under the new regime for the 2023-2024 year.
  • The highest possible surcharge rate has been reduced to 25%.
  • Individuals can lower their gross taxable income with deductions under section 80C, 80D, 80TTA, and 80TTAB, as well as deductions like housing rental allowances and leave travel.

Taxpayers can decide whether they want to continue using the old tax regime or switch to the new one. If they opt to stay with the old regime, they have one chance to opt into the new regime. Once in the new regime, however, they can’t change back.

Changes to Income Tax Slabs

Income tax in India is based on what’s called a slab system. Slabs are similar to income brackets, where different tax rates are applied to different levels of total income. As people make more money, they move into a higher income slab. If they make less, they move to a lower slab.

The new changes simplify things by removing the age differentiators. Under the old regime, taxpayers had different exemption levels based on age, such as super senior citizens (those age 80 and up). That’s no longer the case when determining the income tax rate.

The new tax slabs and taxation rates are as follows:

Impact of the New Tax Regime on Different Income Brackets

The most noticeable impact for a lot of taxpayers is that the threshold for non-taxable income has been raised. Under the old tax regime, the threshold for taxation was Rs 2,50,000. That’s been raised to Rs 3,00,000 with the new tax regime. Furthermore, there is now a rebate offered for anyone who makes less than Rs 7,00,000 to bring taxes owed down to zero.

The high possible rate of taxation for high net-worth individuals has also been lowered to 25% for incomes exceeding Rs 5 crore.

Overall, the impact of the new regime is paying reduced rates and a lower tax liability.

How No Income Tax Applies for Income up to Rs. 7 lakhs

At first glance, having no taxation on the first Rs. 3 lakhs and a rebate for anyone making less than Rs. 7 lakhs can be a little confusing.

What happens is that income tax is first calculated based on the slab that applies to the taxpayer. From there, a rebate is now applied to anyone who makes less than Rs. 7 lakhs to bring the final tax amount down to zero. This only applies to people who choose the new tax regime.

Notable Differences Between the Tax Regimes

Now that you have a high-level understanding of the changes, let’s take a closer look at the finer points. Since taxpayers have to choose between the old regime and the new regime, being able to make a highly informed decision is critical.

Let’s explore the big differences between the two regimes.

Tax Exemptions & Deductions

The big change here is that, while there are lower tax rates under the new regime, there are fewer deductions. The goal was to simplify the process and reduce the need to track expenses and receipts.

The following exemptions and deductions are no longer available to salaried taxpayers under the new tax regime:

  • House rent allowance (HRA)
  • Leave travel allowance/concession (LTA/LTC)
  • Interest paid on a housing loan
  • A deduction of Rs 50,000 for salaried individuals.
  • Section 80TTA/80TTB deductions
  • Entertainment allowance deduction for government employees
  • Professional tax deduction for government employees
  • Rs 15000 deduction previously allowed from family pension under clause (ii a) (Section 57)
  • Chapter VIA deductions like life insurance premiums, employee contribution to provident funds, Mediclaim premiums, and more are also no longer available

Life Insurance Policies

Earnings from life insurance policies with premiums that exceed Rs. 5 lakhs per year are now taxable to the policyholder under the new tax regime. Money obtained from the life insurance policy is tax deductible, but only as long as your premiums don’t exceed 10% of the total amount of the policy.

This change is the result of misuse of the exemption as it existed under the old regime.

Rebates

As we’ve mentioned, the taxable rebate limit under the new regime is now Rs. 7 lakhs. The rebate itself has also increased to Rs. 2.5 lakhs as long as your income is less than Rs. 7 lakhs. It’s worth mentioning that the Section 87A rebate still applies regardless of whether you use the old regime or the new regimes.

Exemption on Leave Encashment

Leave encashment (basically cashing out vacation pay at the end of employment/retirement) is exempt from taxation. The limit was raised from Rs. 3 lakhs to Rs. 25 lakhs for non-government employees. At retirement, taxpayers are now able to get an exemption on their leave catchment of up to Rs. 25 lakh.

Presumptive Taxation

Presumptive taxation allows taxpayers to declare their income at prescribed rates. This removes the burden of maintaining detailed books of accounts and from having to do tax calculations themselves. The goal here, like a lot of the new regime, is to simplify the process for most people. This presumptive taxation process is the same under both the old and new tax regime.

Which Tax Scheme is Right for You?

The decision to choose the new tax regime or the old one depends on a lot of the specific factors that apply to the individual as a taxpayer. This decision should be made after careful consideration. Once you’re using the new regime, you can’t switch back.

Among the factors to consider are investment choices and income levels. For example, some deductions that were possible with investments under the old regime are no longer possible. Similarly, there are new deductions under the new regime that didn’t previously exist.

Generally, what we’ve observed is that the new tax regime is ideal for those in the middle class, with an income of less than Rs. 15 lakh. The old regime is the better choice for high-income earners and senior citizens, who rely on interest income and can claim their interest income under section 80TTB.

New Tax Regime

Generally speaking, the new regime is great for taxpayers making up to Rs. 1.5 lakhs. The taxation rate is lower and, if you’re making less than Rs. 7 lakhs, you can take advantage of the rebates we mentioned earlier.

There are fewer deductions available under the new regime, but the rebates for incomes under Rs. 7 lakhs make up for this. Taxpayers who make fewer investments will also benefit from the new regime because the new tax slab breakdown makes it easier to pay fewer taxes without claiming deductions. Also included in the new regime are a higher leave encashment exemption and surcharge reductions for high net-worth individuals.

Old Tax Regime

Similar to what we discussed earlier, the old tax regime is ideal for people with higher incomes. There are upwards of 70 different deductions and exemptions available to help reduce the tax burden for high-income earners, including the Employees Provident Fund, House Rent Allowance, and Equity-Linked Savings Schemes.

Making the best decision

As with most things tax-related, if you’re not sure what to do, it’s always best to consult with a tax professional, much like you would when filing an income tax return. Unless you’re a financial professional, tax law can be confusing. Major changes like the ones that we’ve covered could make it even more difficult to figure out the best option for your specific personal finance situation.

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