In the last full-fledged budget of the second Narendra Modi government presented by the finance minister Nirmala Sitharaman, major reliefs have been announced for the income tax payers. Under the revised income tax system, the rebate limit for the new tax regime has been increased to ₹7 lakh from ₹5 lakh, meaning no tax for people who have taxable income upto ₹7 lakh. Apart from this, the number of income tax slabs has been reduced to five from the existing six, with each for ₹3,00,000, while it was ₹2,50,000 earlier.
These two changes will cause major benefits for the income tax payers, especially the middle-class citizens. Here we present some illustrations of how the changes will benefit taxpayers compared to the existing rates under both the old and new tax regimes.
Before going into the illustrations, let’s clear a confusion some people are having. Some people are asking why there are tax slabs for 3 lakh to 6 lakh and 6 lakh to 9 lakh if there is no tax for income upto 7 lakh. This is because, the slabs are for the calculation of income tax, and the entire slab will be applicable if the income is above the rebate limit.
While it is correct to say there is no tax upto ₹7 lakh, it is a bit misleading, because the correct system is, while the income tax is calculated using the slab structure, if the taxable income is ₹7 lakh or less, the calculated tax becomes rebate. This rebate is deducted from the income tax, therefore the tax payable becomes nil. But if the taxable income is above ₹7 lakh, then there will be no rebate, and the entire calculated tax will be payable.
In the existing tax structure, the limit is ₹5 lakh, but the system works the same way.
It is also notable that the changes have been made only to the new tax regime, and the rebate and slabs remain the same in the old tax regime. Under the new income tax regime, the income tax rates are lower, but it does not have several deductions and exemptions which are available in the old tax regime. At present, both regimes are available for taxpayers. The new tax regime means that taxpayers do not need to invest in tax-saving instruments to save tax. Taxpayers can choose the income tax regime at the time of filing the return.
Now coming back to illustrations, please note that the taxable amount taken here means the amount on which income tax will be calculated, after any deductions and exemptions. This means, it can be lower than the income for the financial year, as there can be various deductions and exemptions allowed under the Income Tax Act, like contributions for tax-saving instruments, donations, educational expenses and so on.
For a taxable income of various amounts, here are the tax calculations in two scenarios, tax for the assessment year 2024-25 under the new tax regime, and tax for the assessment year 2023-24 under the new tax regime. The calculations under the old regime have not been shown, as the same has not been changed. Moreover, the old regime has much more deductions and exemptions, therefore it can’t be compared with the new regime for the same taxable income.
For ₹7 lakh income under the revised system under the new regime, the calculated tax is ₹25,000, but this entire amount becomes rebate as the taxable income is ₹7 lakh. Therefore, the tax payable will be zero.
Now for the same amount in the existing structure, the tax payable will be ₹32,500. It is notable there is an additional 4% health and education cess on the tax amount, which has not been shown in the calculations. If the cess is included, the final tax will be ₹33,800 for ₹7 lakh taxable income under the existing structure.
If we take an income of ₹6 lakh, the tax will be ₹22,500 under the existing structure. But under the new structure, the tax will be zero as the taxable income is below ₹7 lakh.
For an income of ₹10 lakh, the tax will be ₹60,000, compared to ₹75,000. The amounts are ₹1,50,000 and ₹1,87,000 for 15 lakh income.
Therefore, it can be seen that the net tax outgo for the taxpayers will reduce significantly under the revised tax structure. Today’s budget also announced other reliefs in income tax, including an increase in the standard deduction for salary income, a cut in the highest surcharge rate, and an increase in the limit of tax exemption on Leave Encashment to ₹25 lakh from the current limit of ₹3 lakh. For those whom these changes are applicable, they will get these additional benefits which will reduce their tax amount.
As mentioned earlier, the tax structure only for the new tax regime has been changed, and the old tax regime remains unchanged. Taxpayers have the option of choosing the regime under which they want to pay their tax. However, from next year, the new regime will be made default in the Income Tax portal. Unless a taxpayer has a substantive amount of deductions and exemptions, the new tax regime will be more attractive for most people. It is clear that the govt wants the entire taxpayer base to move to the new regime, with more direct rebate and less complicated deductions and exemptions, and that is why the rebate limit has been increased to ₹7 lakh in the new regime while it remains ₹5 lakh in the old regime.
