Budget 2024: In order to make taxes no longer burdensome, the government has concentrated on streamlining the tax code and lowering tax complexity. One of the attempts to achieve this goal was the introduction of the new personal tax system in the Budget 2020, which is an optional personal tax regime. This system provided drastically lower tax rates for those who opted not to take advantage of key exemptions and deductions.
Overhaul of Deductions and Exemptions
The Income Tax Act, 1961 (“Act”) eliminated about 70 deductions and exemptions out of a total of more than 100, with the intention of reviewing and rationalising the remaining ones as well. Compared to the four-level structure under the previous regime, the New Personal Tax Regime offered reduced tax rates distributed over six income levels.
Exclusion of Common Deductions and Exemptions
As a result of the exclusion of tax benefits associated with some of the most common deductions and exemptions, including section 80C deductions for LIC premiums, PPF deposits, etc., section 80D deductions for medical insurance premiums, section 80G deductions for donations, and section 10(13A) exemptions for HRA, section 10(5) leave travel allowance (LTA), section 10(32) for minor’s income, etc., the New Personal Tax Regime initially elicited mixed reactions. While certain tax benefits were available, such as section 10(14) special allowances and section 80CCD (2) for employer contributions to the National Pension System (NPS).
Uncertainty Surrounding New Personal Tax Regime
There was a great deal of uncertainty on whether tax regime is better since, while the New Personal Tax Regime retained its concessional tax rates, it eliminated the tax benefits associated with certain investments and expenditures.
Taxpayers must carefully assess and weigh this according on their unique circumstances. For example, if you may claim deductions and exemptions for different investments and expenses, you might find the previous system to be more advantageous. The government released an online tax compare calculator to assist and ease this process, allowing people to evaluate their particular circumstances and make well-informed decisions.
Introduction of New Personal Tax Regime
Significant changes to individual tax were introduced in the Budget 2023, but only for those who choose the New Personal Tax Regime. These changes include:
- The “default regime” is the new personal tax regime.
- The basic exemption limit was raised from Rs. 2.5 lacs to Rs. 3 lacs.
- The surcharge rate was lowered from 37% to 25% for income exceeding Rs. 5 crores.
- Residents were eligible for a 100% tax refund on income up to Rs. 7 lacs
- There was a standard deduction of Rs. 50,000 for salaried individuals and pensioners
- deduction Rs. 15,000 for family pensions.
Retirement Savings through NPS
One popular option for retirement savings that both paid and non-salaried people employ is NPS. Expanding the aforementioned deduction under the New Personal Tax Regime would benefit non-salaried people as well, increase the popularity of the New Personal Tax Regime, and concurrently increase NPS.
Keeping the aforementioned in mind, you can assess which regime is best for you by doing a thorough study of your unique tax position. In reality, if you haven’t already, you still have the opportunity to choose the New Personal Tax Regime when you file your taxes by July 31.
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