Income Tax changes - Is there really any benefit?

Eventhough media calls it big relief for the middle class, does it really benefit from the Income tax measures in the last full budget of the government before the 2024 Lok Sabha elections? As a central government employees, is there any advantages for him?

Let's have a quick check.

The Government of India introduced a new optional tax rate regime starting from April 1, 2020 (FY 2020-21), for the Hindu undivided family (HUF). Consequently, Section 115BAC has been added to the Income Tax Act, 1961 (the Act) that prescribed reduced tax rates for individual taxpayers and HUFs on forgoing specified tax deductions or exemptions. 

Eventhough the new tax regime claims to have lower tax rates, it does not have the exemptions and deductions enjoyed in the old scheme.  

Under the old system, income up to ₹2.5 lakh is exempt from personal income tax.

• 0 to 2.5 lakh: Nil
• ₹2.5 lakh to ₹5 lakh: 5%
• ₹5 lakh to ₹7.5 lakh: 15%
• ₹7.5 lakh to ₹10 lakh: 20%
• Above ₹10 lakh: 30%

Ans as per the new income tax slabs announced in the budget 2023 the rates are 

• 0- ₹3 lakh: Nil
• ₹3 lakh to 6 lakh: 5%
• ₹6 lakh to 9 lakh: 10%
• ₹9 lakh to 12 lakh: 15%
• ₹12 lakh to 15 lakh: 20%
• Above ₹15 lakh: 30%

Let us consider an individual with ₹9 lakh annual income. He will pay ₹45,000 tax, -- a reduction of ₹15,000 from the present ₹60,000. A person with ₹15 lakh annual income will have to pay a tax of ₹1.5 lakh down from 1.87 lakh. 

However as most of the salaried class covering the central government employees or middle class will have opted for various savings for which deductions under section Section 80C can be claimed. Also most of them will be having housing loan taken for which the EMI payment will run for most of thier career. The old tax scheme will provide deduction on home loan interest up to Rs 2 lakh under Section 24(b) and tax deduction on the principal repayment up to Rs 1.5 lakh under Section 80C.

The benefits due to this will be more that the above illustrated reductions.

Also he highest tax rate remains unchanged at 30 per cent for income above Rs. 15 lakhs, providing those with income above Rs 15 lakhs with insignificant benefits.

Conidering these benefits it is unlikely that most of the moddle class opt for the new regime. Additional only one time change to old scheme is allowed. 

The new tax regime as on date has not many takers despite the government push. Also it is considered more complicated.

The proposed changes in the new tax regime, combined with no changes being made in the old tax regime, may result in the savings sector and social sector becoming the primary losers. The new tax regime does not offer any tax deductions for investments or for donations to charitable organisations, thereby removing any incentives for individuals to continue making investments in mutual funds, insurance, pension schemes, provident funds, or to donate to charitable causes

Disadvantages of New Tax Regime

As far as salaried are concerned they are not entitled to avail major benefits like House Rent Allowance, Leave Travel Assistance etc. in case they opt for the new tax regime.  The retired senior citizen will not be able to claim deduction in respect of interest from post office and banks u/s 80TTB if you opt for new tax regime.

Moreover various deductions under Chapter VIA like under Section 80 C (comprised of various items like EPF, LIP, School Fee, PPF, NSC, ELSS, home loan repayment etc.), 80 CCD(1) & 80 CCD(1B) (for NPS) 80D (for health insurance premiums) 80 D for mediclaim, 80 G for donations, 80TTA for interest on saving bank account etc. will also not be available to the taxpayers. 

Some of the popular tax exemptions/deductions which are not allowed under new tax regime include:

• Leave travel allowance (LTA)
• House rent allowance (HRA)
• Children education allowance
• Deduction for professional tax
• Interest on housing loan 
• Deduction for specified investments or expenses under Chapter VI-A such as:
  • deduction under Section 80C towards contribution to Public Provident Fund, repayment of principal on housing loan, children’s school fees, life insurance premium, etc.
  • other deductions towards medical insurance premium, interest on education loan, etc.

Also read: Who should opt for the new tax regime?