If the Lord ‘finance minister’ loveth a cheerful giver, how s/he must hate the middle and salaried class taxpayers! Sorry, John Andrew Holmes, for twisting your line a little. The finance minister in her straight fifth Budget has sweetened the 3-year-old new income tax regime. Though the new regime is ‘more attractive’ and set to become the ‘default’ soon, a taxpayer has the option to continue under the old regime with its regular tax exemptions and deductions. The all-new Ver 2.0 regime will come into force with effect from April 1, 2023.
Why is it more ‘attractive’ now?
The new regime Ver 2.0, has a draw having lesser number of tax slabs, increased basic exemption limit, a higher threshold for claiming the full rebate, Standard Deduction (being incorporated into it), lower surcharge, less paperwork and reduced compliance.
In effect, it will leave more money in the hands of the middle class, especially those who earn salaries.
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For instance, people earning up to Rs. 7 lakhs a year, the choice of tax regime will make no difference as the incidence of tax under both regimes will be 0.
Similarly, those who earn income up to Rs. 10 lakhs are also subject to ‘same tax liability’.
However, those who are claiming deductions of Rs. 2.5 lakh or more, will not be benefitted in switching to the new regime.
Who should ‘move’ from the old to the new regime?
Taxpayers with income up to Rs. 7.5 lakh a year and those earning over Rs. 5 crores a year can opt-in because their tax outgo will come down significantly. Those with income between Rs 5 lakh and Rs 7 lakh and availing the rebate under Section 87A, coupled with Standard Deduction of Rs 50,000, are liable to pay no tax.
At the other end of the spectrum, the super-rich earning over Rs 5 crore per annum, will have a reduced surcharge of 25% (as compared to the present 37%). This, in effect, will shrink their gross tax liability including applicable cess to 39% (as against the present 42.74%).
Who should ‘continue’ under the old regime, until the finance ministry phases it out?
Those taxpayers who fall between the two extremes, earning between Rs. 8 lakhs and Rs. 5 crore and claiming deductions and/or exemptions to the tune of Rs. 2.5 lakh or more are better off continuing under the old regime until the finance ministry (in all likelihood) phases out the old regime over a period of time.
The right choice
In the words of the finance minister herself, 50-55% of taxpayers are expected to opt for the more attractive ‘New income Tax Regime – Ver 2.0’ hereinafter. From taxpayers’ point of view, the new regime requires less paperwork, it will not compel them to make specified investments to avail tax exemptions but frees up their cash outgo in the form of tax liability.
Taxpayers should compare their tax outgoes underboth regimes, at the very beginning of the financial year and decide which will suit them best. If still some confusion persists, they should avail a tax professional’s advice. Apart from those taxpayers who committed themselves to the longer tenure of housing loans, tax-exemption saving instruments, health insurance and other social security contributions, the others are advised to switch to the new tax regime Ver 2.0.
(The author is the founder & CEO of Shree Tax Chambers)