New Tax Regime v/s Old Tax Regime: Which One Should You Opt for After Modi 3.0 Budget?

For a thorough analysis of whether the government's actions have met or overlooked the expectations, you may wish to read What to Expect from Modi 3.0 Full Budget on July 23...

On July 23, 2024, Finance Minister Nirmala Sitharaman presented the interim budget for the Modi 3.0 government, unveiling a strategic blueprint designed to propel India's economic growth and ensure fiscal stability. This interim budget, marking a pivotal moment in the current administration's tenure, introduces significant reforms aimed at simplifying tax compliance, boosting investment, and fostering inclusive development.

A cornerstone of this budget is the restructuring of the personal income tax framework. These changes are expected to provide substantial relief to the middle class, enhancing disposable incomes and stimulating consumer spending. Another critical aspect of the budget is the enhancement of the Goods and Services Tax (GST) regime. The government has proposed a more streamlined GST return filing process to alleviate the compliance burden on small and medium-sized enterprises (SMEs).

FM announced cuts in customs duties for a slew of products like - Mobile phones and chargers, Printed Circuit Board Assembly (PCBA) and Oxygen, Precious metals like Gold, Silver and Platinum, Blister Copper and Ferro-Nickel, Cancer drugs - Trastuzumab Deruxtecan, Osimertinib and Durvalumab and Medical products like orthopaedic implants, artificial parts of the body.

In the interim budget for 2024-25, the Modi 3.0 government has announced an increase in the capital gains tax, marking a significant shift in the taxation landscape for investors. The increased rates are expected to impact both short-term and long-term capital gains, altering the investment strategies for individuals and institutional investors alike.

[Read: The Changes in Capital Gain Tax Done by Modi 3.0 Budget 2024-25 You Need to Know]

Simplification of Capital gains tax for FY 2024-25:

• ⁠STCG on certain financial assets shall attract tax at 20% as against current applicable rates

• LTCG on all financial and non-financial assets increased to 12.5%

• For the benefit of the lower and middle-income classes, the government raised the exemption limit on certain financial assets to Rs 1.25 lakh from Rs 1 lakh per year.

Finance Minister Nirmala Sitharaman has announced a comprehensive review of the Income Tax Act and proposed easing taxation norms for individuals and entities. This budget has brought forth significant changes in the taxation system, aiming to simplify tax compliance and offer taxpayers with more options.

Individual taxpayers are taxed based on their income level under the Indian income tax system. A slab system establishes different tax rates for various income groups. This method of taxation helps the government establish progressive and equitable taxes.

Income Tax Slabs in India are announced by the finance minister every year. At present, there are two different Income Tax regimes Old and New. Previously, the Union Budget for FY 2020-21 announced by Ms Nirmala Sitharaman, altered the mechanism of taxation. A New Tax Regime was introduced, which resulted in considerable reductions in tax rates as well as a major drop in tax-saving options.

The New Tax Regime, endeavours to make it easier to file Income Tax Returns (ITR). However, the Old Tax Regime is also retained, giving taxpayers the option to choose between the two tax regimes.

One of the most prominent aspects of these changes in the Modi 3.0 income tax budget 2024 is the ongoing debate between the New Tax Regime and the Old Tax Regime. Both regimes have their distinct features and benefits, leaving taxpayers with a crucial decision: which regime should they opt for?

[Read: Old Tax Regime vs New Tax Regime: Which One Should You Opt For]

This article delves into the intricacies of both regimes post the Modi 3.0 budget, helping you make an informed choice.

Overview of the Old Tax Regime

While much focus has been on the New Tax Regime introduced in previous budgets, the Old Tax Regime continues to play a critical role for many taxpayers.

The Old Tax Regime is the traditional taxation system that has been in place for several years. It allows taxpayers to avail themselves of various deductions and exemptions, thus reducing their taxable income. The regime is structured with higher tax rates compared to the New Tax Regime but offers significant tax-saving opportunities through different sections of the Income Tax Act.

There have been no changes made in the income tax slabs and rates under the old tax regime in the full Budget 2024, presented on July 23, 2024.

Key Features:

• Higher Tax Rates: The tax rates under the Old Tax Regime are higher but can be offset by various deductions and exemptions. The rates are as follows:

  Net Taxable Income	Income Tax Slab Rate
  Rs 0 - 2.5 lakhs	0%
  Rs 2.5 - 5 lakhs	5%
  Rs 5 - Rs 10 lakhs	20%
  Above Rs 10 lakhs	30%

   

  Under the old tax regime, the basic exemption limit for senior citizens (above 60 years but below 80 years) and super senior citizens (80 years of age and above) is Rs 3 lakh and Rs 5 lakh, respectively. Despite the high tax rates, there are various ways to reduce your tax liability.

• Deductions & Exemptions: Through the addition of sections to the Income Tax Act over the years, the government has granted around 70 exemptions and deduction options to Indian taxpayers, allowing them to reduce their taxable income and thus save money on taxes.

  Section 80C: Allows deductions up to Rs 1.5 lakhs for investments in PPF, EPF, NSC, life insurance premiums, ELSS, and other specified instruments.

  Section 80D: Provides deductions for health insurance premiums paid for self, spouse, children, and parents.

  House Rent Allowance (HRA): For those living in rented accommodation, HRA can be claimed based on actual rent paid, salary, and city of residence.

  Leave Travel Allowance (LTA): Allows exemption for travel expenses incurred by the taxpayer and their family.

  Standard Deduction: A standard deduction of Rs 50,000 for salaried individuals.

• Flexibility in Tax Planning: The Old Tax Regime offers flexibility for taxpayers to plan their finances and investments strategically to maximize tax savings. On the contrary, due to the availability of numerous deductions and exemptions, tax filing under the Old Tax Regime can be complex and requires meticulous documentation and planning.

Overview of the New Tax Regime and Revised Rates

The New Tax Regime was introduced in the 2020 budget as an optional tax structure, offering lower tax rates with the removal of most deductions and exemptions. The aim was to simplify the tax system and reduce the compliance burden on taxpayers.

The recent, 2024 budget introduced several significant changes to the new tax regime, making it more attractive and competitive compared to the old regime. The standard deduction for salaried employees is proposed to be increased from Rs 50,000/- to Rs 75,000/-.

Similarly, the deduction on family pension for pensioners is proposed to be enhanced from Rs 15,000/- to Rs 25,000/-. This will provide relief to about four crore salaried individuals and pensioners. Plus, the deduction on employer's NPS contribution for private sector employees hiked to 14% from 10%.

Moreover, in the new tax regime, the tax rate structure is proposed to be revised, as follows:3

As a result of these changes, a salaried employee in the new tax regime stands to save up to Rs 17,500/- in income tax.

Which Tax Regime Should You Opt For: Old or New?

The decision to choose between the new tax regime and the old tax regime depends on various factors, including your income level, the deductions and exemptions you can claim, and your preference for simplicity in tax filing.

Considerations for the New Tax Regime

• Higher Incomes with Few Deductions: If you have a higher income and do not avail of many deductions and exemptions, the new regime's lower tax rates can be beneficial.

• Simplified Tax Filing: For those who prefer a simpler tax filing process without the hassle of documenting and claiming multiple deductions, the new regime is a better choice.

Considerations for the Old Tax Regime

• Effective Use of Deductions: If you can effectively utilize various deductions and exemptions to significantly reduce your taxable income, the old regime can offer better tax savings.

• Higher Investments in Tax-Saving Instruments: Individuals who invest heavily in tax-saving instruments like PPF, EPF, life insurance, and health insurance can benefit more from the old regime.

The interim budget of 2024 under the Modi 3.0 government has introduced noteworthy changes to the new tax regime, making it attractive to taxpayers. With increased exemption limits, revised tax rates, and simplified compliance measures, the new regime offers substantial benefits, especially for those with higher incomes and minimal deductions.

However, the old tax regime still holds its ground for taxpayers who may effectively leverage various deductions and exemptions to reduce their tax liability.

Ultimately, the choice between the new and old tax regimes depends on individual circumstances and preferences. Taxpayers should carefully evaluate their income, potential deductions, and the simplicity of the filing process to make an informed decision. Whether opting for the new or old regime, the key is to choose the one that best aligns with your financial goals and tax planning strategy.

To conclude...

The first full budget of the Narendra Modi-led NDA government's third term has set high expectations. Prior to its presentation, Prime Minister Modi emphasized that this budget aims to lay the groundwork for a 'Viksit Bharat' (Developed India). He described it as a pivotal budget for 'Amrit Kaal', a term signifying a 'great leap' forward, with the potential to drive India's progress across multiple dimensions.

This budget not only aims to address immediate economic challenges but also envisions long-term structural reforms, targeting sustainable growth, digital transformation, and inclusive development. As the nation anticipates the outcomes, this budget could be a crucial step in India's journey towards becoming a global economic powerhouse.

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MITALI DHOKE is a Research Analyst at PersonalFN. She is an MBA (Finance) and a post-graduate in commerce (M. Com). She focuses primarily on covering articles around mutual funds including NFOs, financial planning and fixed-income products. Mitali holds an overall experience of 4 years in the financial services industry.
She also actively contributes towards content creation for PersonalFN’s social media platforms in the endeavour to educate investors and enhance their financial knowledge.
 

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This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.