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New income tax regime: Explained

In the new tax regime, one can't avoid income tax outgo via the donation route if one's annual income surpasses ₹7 lakh limit by a few rupees or a few thousand of rupees

New income tax regime: Under Section 87A, a taxpayer is given a tax rebate of ₹25,000 in both new and old tax regimes.


NEW INCOME TAX REGIME

After simplifying the new income tax slab and extending Section 87A benefits from ₹12,500 to ₹25,000 in both new and old tax regimes, a debate on old versus new tax regimes has begun among the salaried middle class as to which is better suited to them. The budget 2023 announcements in regard to income tax exemption on up to ₹7 lahks annual income look attractive for the middle-class salaried individual, but is it exactly what it seems at first sight?


According to tax and investment experts, Finance Minister Nirmala Sitharaman has tried to make the new tax regime more attractive by simplifying the new income tax slab and extending Section 87A benefits to it as well. But, the use is not uniform as it is available for only those earning individuals with an annual income of up to ₹7 lahks. If a taxpayer earns more than ₹7 lahks, then he or she will have to pay income tax on all income beyond ₹3 lahks per annum.


Highlighting the catch in this old vs new tax regime, Mumbai-based tax expert Balwant Jain said, "Finance Minister Nirmala Sitharaman has extended Section 87A benefit of ₹25,000 (raised from ₹12,500) announced in this budget to new tax regime as well. As the new income tax slab implied a 5 per cent tax on one's annual income from ₹3,00,001 to ₹6 lahks and a 10 per cent income tax on one's annual income from ₹6,00,001 to ₹9 lahks, ₹25,000 tax exemption makes it zero income tax on income up to ₹7 lahks in new income tax regime. However, if someone has an annual income above ₹7 lahks, then in that case, this Section 87A benefit won't be applicable for such taxpayer while filing their income tax return (ITR)."

Photo: Courtesy Mundra & Associates, a CA firm.
New Income Tax Slab

Explaining the Section 87A benefit, Pankaj Mathpal, MD & CEO at Optima Money Manager, said, "Earlier, Section 87A benefit allowed tax exemption of ₹12,500 in a single financial year, which has now been extended to ₹25,000 in one financial year. So, due to this exemption, the non-taxable annual income limit has gone up from ₹5 lakh to ₹7 lakh. But, if an earning individual has an annual income above ₹7 lahks, then in that case, one will have to pay income tax on one's annual income above ₹3 lahks."


Pankaj Mathpal went on to add that in the old tax regime, an income tax payee has an option to donate and claim an income tax rebate, whereas, in the new income tax regime, this facility is not available. So, if one's annual income goes above ₹7 lahks by even just Re 1, one will have to pay income tax from ₹3,00,001 onwards.


OLD VS NEW TAX REGIME

On how one's Re 1 income can become a nightmare for an income taxpayer in this new income tax regime, Balwant Jain explained, "If an individual earns ₹7,00,006 in one financial year, as ₹7,00,005 annual income would be considered ₹7 lahks annual income, would lead to 5 per cent tax on ₹3,00,001 to ₹6 lahks and 10 per cent tax on ₹6,00,01 to ₹7,00,005. This means ₹15,000 income tax on one's income from ₹3,00,001 to ₹6 lahks and ₹10,000 income tax on ₹6,00,001 to ₹7,00,005 income. Therefore, the additional Re 1 may lead to ₹25,000 income tax outgo in the new tax regime, which a taxpayer can avoid using the donation route available in the old tax regime."

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