New Tax Regime & Proposed taxation system

Analysis of Issues in India’s New Tax Regime & Proposed Taxation system

India’s tax system offers two personal tax regimes:

• Old Tax Regime: Higher rates, numerous exemptions and deductions.
• New Tax Regime : Lower rates, fewer deductions, now the default option.
• Both regimes allow a INR 50,000 standard deduction for salaried individuals, ensuring some parity in basic tax relief.
• Taxpayers must compare both systems, adding complexity instead of simplifying compliance. Most taxpayers, especially salaried individuals, lack professional assistance. Determining the optimal regime is daunting, especially for those without business or professional income.

Who Benefits from the New Tax Regime?

The New Tax Regime is ideal for:

• Individuals with minimal tax-saving investments or deductions.
• Taxpayers preferring a straightforward tax filing process.
• Those with income primarily in lower tax brackets.

Limited Adoption of the New Tax Regime  : Despite being default, taxpayers resist due to loss of deductions (e.g., Section 80C, medical insurance). Exclusions undermine its appeal, especially for those relying on such benefits.

New Tax Regime – Tax Rate Trade-offs

• Pros: New Tax Regime offers lower tax rates and eliminates the complexity of claiming multiple deductions.
• Cons:
  • Loss of key tax-saving deductions like Section 80C, 80D, HRA, and others.
  • The threshold for the highest tax rate is higher, but overall liability can increase for those with substantial investments or deductions.

Steps to Take Immediately

• Compare Both Regimes: Use online calculators or consult a tax expert to evaluate your tax liability under both New Tax Regime and Old Tax Regime.
• Communicate with Employers: Inform your employer of your chosen tax regime before the payroll deadlines.
• Submit Documentation: For the Old Regime, ensure timely submission of proofs for deductions like HRA, 80C investments, etc.
• Strategize Investments: Align your investment portfolio to maximize tax benefits under the regime best suited to your financial goals.

The Hidden Trap in New Tax Regime :

The New Tax Regime, as a default system, nudges taxpayers into simplicity at the cost of potential tax savings. Many individuals may unknowingly pay higher taxes by failing to assess their options, particularly those accustomed to leveraging deductions like:

• INR 1,50,000/- u/s 80C.
• INR 2,00,000/- for home loan interest (Section 24(b)).
• Medical insurance premiums under Section 80D.

Critical Questions for Self-Assessment

• Are you claiming enough deductions under the Old Regime to offset its higher tax rates?
• Is simplicity worth the potential loss of savings?
• Do you fully understand the implications of your default choice?

Rigidity in Switching Regimes:

• Salaried Individuals: Annual flexibility exists, but defaults to New Tax Regime unless declared otherwise.
• Business/Professional Taxpayers: Switching back to the New Tax Regime after opting out is allowed only once, limiting flexibility.

Switching Rules

• Salaried Employees:
  • Flexibility to switch annually between New Tax Regime & Old Tax Regime.
  • Must declare your choice to the employer before the start of the financial year; otherwise, the default is NTR.
• Business owners and professionals:
  • Switching is restricted to a one-time change.
  • Filing Form 10-IEA is mandatory to opt back into the Old Tax Regime.
  • Limited flexibility underscores the importance of careful consideration.

Comparison of exemptions and deductions available under the Old Tax Regime and New Tax Regime

Comparison of exemptions and deductions available under the Old Tax Regime and New Tax Regime for the Financial Year 2024-25 (AY 2025-26):

Exemptions / Deductions	Old Tax Regime	New Tax Regime (Section 115BAC)
Standard Deduction (INR 50,000)	✅ Available	✅ Available (for salaried & pensioners)
House Rent Allowance (HRA)	✅ Available	❌ Not Available
Leave Travel Allowance (LTA)	✅ Available	❌ Not Available
Deductions under Section 80C (₹1.5L) (LIC, PPF, EPF, ELSS, NSC, etc.)	✅ Available	❌ Not Available
NPS Contribution (80CCD(1B)) (INR 50,000)	✅ Available	❌ Not Available
Employer Contribution to NPS (80CCD(2))	✅ Available	✅ Available (for salaried employees)
Medical Insurance Premium (80D)	✅ Available	❌ Not Available
Interest on Home Loan (80EEA / 80EE / 24(b))	✅ Available	❌ Not Available
Education Loan Interest (80E)	✅ Available	❌ Not Available
Interest on Savings Account (80TTA/80TTB)	✅ Available	❌ Not Available
Disability Benefits (80U, 80DD, 80DDB)	✅ Available	❌ Not Available
Donations (80G, 80GGA, etc.)	✅ Available	❌ Not Available
Agricultural Income Exemption	✅ Available	✅ Available
EPF / PPF / VPF Exemptions	✅ Available	❌ Not Available
Meal Coupons / Food Allowance	✅ Available	❌ Not Available
LTCG Exemption on Equity (INR 1,00,000/- under 112A)	✅ Available	✅ Available
Transport Allowance for Disabled Employees	✅ Available	✅ Available
Family Pension Deduction (INR 15,000 or 1/3rd)	✅ Available	✅ Available

Key Observations:

1. Old Tax Regime allows various deductions and exemptions, making it beneficial for taxpayers who have significant investments in PPF, LIC, EPF, NPS, home loans, and medical insurance.
2. New Tax Regime has lower tax rates but does not allow most deductions and exemptions, except standard deduction, employer’s NPS contribution, family pension deduction, and transport allowance for disabled employees.
3. Salaried individuals and pensioners benefit from the standard deduction under both regimes.
4. New Tax Regime is the default option, but taxpayers can opt for the Old Regime if they want to claim deductions.  New Tax Regime Provides higher rebate limits (INR 7,00,000/- ) and standard deduction (INR 75000) but eliminates most exemptions and deductions except for standard deduction and the employer’s NPS contribution.
5. Which one to choose?
   • If you have significant deductions and exemptions, Old Tax Regime might be beneficial.
   • If you prefer lower tax rates and simpler compliance, New Tax Regime is an option.
6. The decision should be based on the total taxable income and the benefit of deductions vs. lower tax rates.

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