Explained: The Benefits Of Selecting The New Tax Regime

The Union Budget 2023 has provided a boost to the new income tax regime by undertaking several measures that make it more attractive for taxpayers.

The biggest impact however is likely to be from a non-financial measure. The new tax regime will now be the default option. What this means is that if you do nothing, then the tax calculation will be as per the new regime. And if you want to stick to the old regime, then you will need to specify that you will stick to the old regime.

This is a big change from the current system where the default is the old regime and only if you want to go to the new regime you have to make the change.

The importance of this move is rooted in human behaviour because it has been proved that it is far difficult to get people to choose an option different from what they have now. People tend to do nothing, so the default option becomes the automatic choice. This simple switch will make the new tax regime being chosen more by taxpayers.

To be sure, there are now several other reasons for the attractiveness of the new tax regime.

Standard deduction available

For the salaried class plus those getting pension and family pension, they have the benefit of a standard deduction under the old regime. The good news is that this becomes the only deduction that is carried over to the new regime. So a deduction which is reduction of the taxable income is available in the new tax regime too.

Change of slabs

The existing slabs in the new tax regime are in blocks of Rs 2.5 lakh each, so the income from Rs 2.5 lakh to Rs 5 lakh is taxed at 5% and then the next block at 10% and so on. The blocks have now been revised to Rs 3 lakh each so the 5% slabs is for Rs 3 to 6 lakh. Then the 10% rate is for Rs 6 to 9 lakh and so on.

The tax impact is also now lower by a significant amount. For example a non salaried taxpayer with Rs 10 lakh in gross income taking Rs 2 lakh worth of deductions would pay Rs 72,500 without education cess in the old regime but only Rs 60,000 without education cess in the new regime under the new rates.

Rebate

There is a rebate that is available under Section 87A of the Income Tax Act. This reduces the tax that you have to pay if the taxable income is below a certain limit. The current limit is Rs 5 lakh under the old tax regime and this will be higher at Rs 7 lakh in the new regime. This means more income will not have a final tax outflow.

Surcharge

The rich also have a cause for a lower tax impact in the new regime because the highest surcharge has been reduced to 25% from the 37% that is present in the old tax regime for income above Rs 2 cr. This will cap the maximum tax rate under the new regime at 39% after considering cess.