Introduction
India's tax system has introduced a new tax regime under Section 115BAC of the Income Tax Act, 1961. This regime aims to simplify the tax structure by offering lower tax rates but removes various deductions and exemptions available in the old regime. Here’s a detailed guide to help you understand what deductions and exemptions are not available in the new regime, the conditions for opting or switching regimes, and how to make an informed decision.
New Tax Regime: Tax Rates
| Total Income | Rate of Tax |
|---|---|
| Up to ₹3,00,000 | Nil |
| ₹3,00,001 to ₹6,00,000 | 5% |
| ₹6,00,001 to ₹9,00,000 | 10% |
| ₹9,00,001 to ₹12,00,000 | 15% |
| ₹12,00,001 to ₹15,00,000 | 20% |
| Above ₹15,00,000 | 30% |
Deductions and Exemptions Not Available in the New Tax Regime
The new tax regime removes many deductions and exemptions available in the old regime. Here's a comprehensive table of what you cannot claim under the new tax regime:
| Sr. No | Section | Clause(s) | Deduction/Exemption Not Allowed |
|---|---|---|---|
| 1 | Section 10 | Clause 5 | Travel Concession or Travel Assistance from employer for self & family |
| Clause 13A | House Rent Allowance (HRA) | ||
| Clause 14 | Special allowances/benefits other than perquisites | ||
| Clause 17 | Daily Allowance received by a Member of Parliament | ||
| Clause 32 | ₹1500 each minor child income referred in section 64(1A) | ||
| 2 | Section 10AA | Income from newly established units in Special Economic Zone (SEZ) | |
| 3 | Section 16 | Clause (ii) | Entertainment Allowance |
| Clause (iii) | Employment Tax | ||
| Clause (i) | ₹50,000 standard deduction (Note: From AY 24-25, standard deduction is allowed in new regime) | ||
| 4 | Section 24 | Clause b | Interest on borrowed capital for self-occupied property |
| 5 | Section 32(1) | Clause (iia) | Additional Depreciation @ 20% |
| 6 | Section 32AD | Depreciation on investment in new plant & machinery in notified backward area @ 15% | |
| 7 | Section 33AB | Tea, Coffee, Rubber business: Deposit amount or 40% of profit as deduction | |
| 8 | Section 33ABA | Site Restoration Fund: Deposit amount or 20% of profit as deduction | |
| 9 | Section 35(1) | Clause (ii) | Expenditure on scientific research |
| Clause (iia) | |||
| Clause (iii) | |||
| 10 | Section 35(2AA) | In-house research expenditure for biotechnology companies | |
| 11 | Section 35AD | Capital expenditure for specified business before commencement | |
| 12 | Section 35CCC | Expenditure on agricultural extension projects | |
| 13 | Chapter VI-A | All deductions except Section 80CCD(2), 80CCH(2), 80JJAA | |
| 14 | Section 115BAC(2) | Clause (ii) | No set off of any loss carried forward or depreciation from earlier years |
| Clause (iv) | No exemption/deduction for allowances or perquisites under any other law |
Analytical Comparison Between Old and New Tax Regimes
Tax Rates vs. Deductions
Old Regime:
- Higher Tax Rates: Tax rates start at 5% for income above ₹2.5 lakh and can go up to 30% for income above ₹10 lakh.
- Available Deductions: Includes standard deductions, Section 80C investments, HRA, home loan interest, etc.
- Effective Tax Saving: Beneficial for taxpayers who have significant deductions and exemptions.
New Regime:
- Lower Tax Rates: Tax rates are lower compared to the old regime, starting at 5% for income above ₹3 lakh and maxing out at 30% for income above ₹15 lakh.
- No Deductions/Exemptions: Removes all major deductions and exemptions, simplifying tax calculations.
- Simplicity: Easier for those who do not wish to invest in tax-saving instruments or have minimal deductions.
Practical Example
Consider an individual with an annual income of ₹12,00,000.
Old Regime Calculation:
- Gross Income: ₹12,00,000
- Standard Deduction: ₹50,000
- Section 80C Deduction: ₹1,50,000 (Investment in PPF, EPF, etc.)
- Taxable Income: ₹10,00,000
Tax Calculation:
- Up to ₹2,50,000: Nil
- ₹2,50,001 to ₹5,00,000: 5% of ₹2,50,000 = ₹12,500
- ₹5,00,001 to ₹10,00,000: 20% of ₹5,00,000 = ₹1,00,000
Total Tax:
- ₹12,500 + ₹1,00,000 = ₹1,12,500
New Regime Calculation:
- Gross Income: ₹12,00,000
- No deductions/exemptions
Tax Calculation:
- Up to ₹3,00,000: Nil
- ₹3,00,001 to ₹6,00,000: 5% of ₹3,00,000 = ₹15,000
- ₹6,00,001 to ₹9,00,000: 10% of ₹3,00,000 = ₹30,000
- ₹9,00,001 to ₹12,00,000: 15% of ₹3,00,000 = ₹45,000
Total Tax:
- ₹15,000 + ₹30,000 + ₹45,000 = ₹90,000
Decision-Making Factors
Income Level:
- Higher-income individuals may find the new regime beneficial due to lower rates despite losing out on deductions.
- Lower-income individuals or those with substantial deductions may find the old regime more advantageous.
Investment Preferences:
- If you regularly invest in tax-saving instruments (e.g., PPF, ELSS), the old regime might offer better tax savings.
- If you prefer simplicity and minimal investment, the new regime may be easier and more beneficial.
Long-Term Financial Planning:
- Consider long-term goals such as retirement savings, home loans, and education expenses, which might be better supported by the old regime’s deductions.
Conditions for Opting or Switching Between Regimes
New Tax Regime (Section 115BAC):
- Applicable to individuals, Hindu Undivided Families (HUFs), association of persons (other than co-operative societies), bodies of individuals, whether incorporated or not, or artificial juridical persons.
- Opt-in: The option to choose the new regime must be exercised before the due date of filing the income tax return.
- Opt-out: You can switch back to the old regime in the next financial year, but frequent switching is not allowed for individuals with business income.
Old Tax Regime:
- Continues with existing slabs and allows all deductions and exemptions.
Penalties for Wrong Claims
Underreporting Income:
- Penalty is 50% of the tax payable on underreported income.
Misreporting Income:
- Penalty is 200% of the tax payable on misreported income.
Incorrect Claims:
- Filing incorrect claims, whether intentional or not, can result in additional interest, penalties, and scrutiny from tax authorities.
Conclusion
Choosing between the old and new tax regimes requires careful analysis of your financial situation. The new regime offers lower tax rates but removes many deductions and exemptions. By understanding the deductions and exemptions not available under the new regime, and considering your own financial goals, you can make an informed decision. Remember to always report your income accurately to avoid penalties and legal issues.
