The Centre pushed for more people to choose the new, simpler tax system in the Budget 2024, which can help those in lower income brackets.
During her presentation of the Budget 2024–25 in Parliament on Union Finance Minister Nirmala Sitharaman made statements that would provide better benefits to taxpayers who choose to adopt the new tax structure. In the long run, though, individuals with higher earnings and larger tax deductions might find the incentives provided by the previous tax system more alluring.
Nirmala Sitharaman liberalised income tax slabs and increased the standard deduction from ₹50,000 to ₹75,000 under the new, simplified tax system. People with salaries would be better suited moving to the new tax system in light of the recent adjustments, notwithstanding the government’s insistence.
However, if one is claiming deductions of up to ₹2 lakh on home loan interest or are eligible for hefty house rent allowance (HRA), the old tax regime makes much more sense.
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Old tax regime better for higher deductions
For example, under the previous tax system, a salaried employee’s outgo would have been lower if they claimed deductions totalling more than ₹3,93,750 and had an income of ₹11 lakh. A couple with two incomes can claim the same deduction, even though it is rare for an individual with ₹11 lakh to be able to claim such a high amount.
For an individual earning approximately ₹60 lakh, the previous system would be more appropriate if they are claiming deductions over ₹3,93,750. However, the new and simpler tax structure will be significantly more advantageous for individuals with incomes up to about ₹7.75 lakh.
Individuals earning more than ₹10 lakh would benefit more from the previous tax regime because it allows for greater deduction flexibility, which increases savings for those with higher incomes.
New tax regime for low-income salaried employees
The finance minister adjusted tax slabs for taxpayers choosing the new income tax regime and increased the standard deduction for middle-class individuals by 50% to ₹75,000, a fixed deduction from an employee’s entire annual wage before determining the applicable income tax rate.
Under the new tax regime, those earning less than ₹7 lakh might have their tax outflow reduced to zero. Under the new tax regime, a salaried employee earning up to ₹7.75 lakh will not be required to pay any taxes at all because of the higher ₹75,000 deduction.
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The new, simpler tax system will be more advantageous for those earning, say, ₹6 crore, or considerably more. Since the surcharge rate is lower than it was under the previous regime—39 percent—less tax will be due on this income.
In conclusion, individuals with more deductions and relatively high incomes are predicted to support the old tax system, whereas individuals with incomes up to ₹7 lakh and beyond ₹5–6 crore are predicted to support the simplified system.
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