 "The recent decline in corporate earnings is likely to cast a shadow on the government's direct-tax receipts and its fiscal position.")
Since 2020, the government has been trying to encourage individual taxpayers to move to the new income tax regime. The old regime, however, allows deductions on investments made under sections 80C, 80CC, and health insurance under 80D. This has led some taxpayers to stick with it.
The government on Saturday said the old tax regime will continue. But with the changes announced in Budget 2025, does it still make sense to use it?
Higher exemption limit and new tax slabs
Finance Minister Nirmala Sitharaman announced on February 1 that individuals earning up to Rs 12 lakh per year will not have to pay any taxes, raising the exemption threshold from Rs 7 lakh. The tax slabs have also been restructured.
Rajarshi Dasgupta, executive director-tax at AQUILAW, explains what this means by looking at an example of a 45-year-old Noida resident earning Rs 14 lakh per annum.
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For the financial year 2024-25, assuming the following details:
Total salary: Rs 14 lakh
Basic: Rs 6,00,000
HRA: Rs 3,00,000
Employee contribution to NPS: Rs 1,08,000
Employer contribution to NPS: Rs 1,08,000
Other allowances: Rs 2,84,000
Other components:
Interest on fixed deposits (FDs): Rs 15,000
Interest on savings bank account, NSC, etc.: Rs 12,000
Additional expenses:
Home loan EMI: Rs 60,000 per month, with an annual interest outlay of Rs 2,40,000
Health insurance premium for self: Rs 20,000
Health insurance premium for parents (not senior citizens): Rs 21,000
Dasgupta says that before comparing, it is important to note:
< The old regime allows deductions under sections such as 80C (life insurance premiums, etc.), 80D (health insurance), 80TTA (interest on savings accounts), and home loan interest.
< The new regime offers a standard deduction of Rs 75,000 for salaried individuals and allows employer contributions to NPS under section 80CCD(2) up to 14% (compared to 10% in the old regime).
Tax comparison in detail
Old regime:
Total income: Rs 14,27,000
Deductions:
Home loan interest deduction (24): Rs 2,00,000
Health insurance deduction (80D): Rs 41,000
Savings interest deduction (80TTA): Rs 10,000
NPS deduction (Employer 80CCD(2)): Rs 60,000
NPS deduction (Employee 80CCD(1)): Rs 90,000
Standard deduction: Rs 50,000
Total deductions: Rs 4,01,000
Taxable income: Rs 9,76,000
Tax liability: Rs 1,05,200
Cess (4%): Rs 4,208
Total tax liability: Rs 1,09,408
Effective rate of tax: 7.67%
New regime (existing slabs):
Total income: Rs 14,27,000
Deductions:
NPS deduction (Employer 80CCD(2)): Rs 84,000
Standard deduction: Rs 75,000
Total deductions: Rs 84,000
Taxable income: Rs 12,68,000
Tax liability: Rs 93,600
Cess (4%): Rs 3,744
Total tax liability: Rs 97,344
Effective rate of tax: 6.82%
New regime (proposed slabs):
Total income: Rs 14,27,000
Deductions:
NPS deduction (Employer 80CCD(2)): Rs 84,000
Standard deduction: Rs 75,000
Total deductions: Rs 84,000
Taxable income: Rs 12,68,000
Tax liability: Rs 70,200
Cess (4%): Rs 2,808
Total tax liability: Rs 73,008
Effective rate of tax: 5.12%
After the Budget, Central Board of Direct Taxes (CBDT) chairman Ravi Agrawal told Business Standard: "We would be interested to know who would want to remain in the old regime and why? About 74% people have already opted for the new regime and with these tax slabs, why would a taxpayer want to be in the old engine?"
The numbers suggest the old tax regime may be on its last legs. Under the old regime, even with all available deductions, a taxpayer would owe Rs 1,09,408. After the Budget 2025 changes take effect, the tax liability under the new regime would drop to Rs 73,008. This means, tax liability decreases by approximately 33.27% under the new regime.
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