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Last year, during the Budget 2023 speech, Finance Minister Nirmala Sitharaman gave complete tax exemption to taxpayers with an annual income of less than ₹ 7 lakh to give relief in income tax to the middle class, whereas earlier this exemption was available only to those whose annual income was less than ₹ 5 lakh. The most important and notable thing in this relief announcement was that this exemption is to be given only to those taxpayers who will adopt the new tax system and leave the old tax system.
Another thing worth noting is that this exemption will be available only while accounting for the income of the financial year 2023-24 i.e. while filing ITR. However, for those taxpayers who invest in small savings schemes, or are paying premium by buying a life insurance policy, or have opened a PPF account, or have taken a home loan for their house, or get HRA exemption in house rent allowance by living in a rented house, the old tax system is considered better. Broadly speaking, for those taxpayers who get a total exemption or deduction of ₹ 3 lakh or more in different items apart from standard deduction, the old tax system will be better. Therefore, when you file ITR i.e. Income Tax Return, you should choose the beneficial tax system only after doing complete calculations.
Clear this misconception…
There is a rumour in many places that if a taxpayer has once chosen the new tax system, he cannot choose the old tax system even if he wants to. But such news is just a rumour and is not completely true. The reality is that according to the rules, only business class taxpayers, who are not salaried or pensioners, will not be able to return to the old tax system after choosing the new tax system. The option of choosing the new or old tax system will be available every year for the salaried class, that is, despite choosing the new tax system once, if he wants, he can return to the old tax system next year.
What was the actual announcement…?
In the year 2020, the Finance Minister had announced the new tax system from the financial year 2020-21, i.e. assessment year 2021-22, under section 115BAC of the Income Tax Act. Even at that time, the income tax slabs announced under the new system were quite beneficial, that is, in the new tax system, the tax rates were kept very low even for large incomes, but there was no provision for getting any kind of exemption or deduction in this system. The old tax system was retained, in which zero tax was to be paid on income up to Rs 2.5 lakh, 5 percent tax on income from ₹ 2.5 lakh to ₹ 5 lakh, 20 percent tax on income from ₹ 5 to ₹ 10 lakh and 30 percent tax on income above ₹ 10 lakh. These slabs are exactly the same in the old tax system even today.
Income tax slabs in the new tax system…
As per the announcement made in the budget of the year 2020, according to the tax slabs created in the new tax system, there was zero tax on income up to ₹2.5 lakh, 5 percent on income from ₹2.5 to ₹5 lakh, 10 percent on income from ₹5 to ₹7.5 lakh, 15 percent on income from ₹7.5 lakh to ₹10 lakh, 20 percent on income from ₹10 to ₹12.5 lakh, 25 percent on income from ₹12.5 lakh to ₹15 lakh and 30 percent tax on income above ₹15 lakh, but now the tax slabs of the new tax system have been changed, and now the amount of tax-free income has been increased from ₹2.5 lakh to ₹3 lakh. Due to this, those who adopt the new tax system will have to pay 5 percent tax on the next 3 lakh rupees, i.e. 10 percent tax on income from 3 lakh to 6 lakh rupees, 15 percent tax on income from 6 to 9 lakh rupees, 15 percent tax on income from 9 to 12 lakh rupees and 20 percent tax on income from 12 to 15 lakh rupees. As before, 30 percent tax will have to be paid on income above 15 lakh rupees.
Income up to Rs 7 lakh is tax free in NTR…
As per the announcement made in the year 2020, apart from the tax slabs, in both the tax systems, in case the annual income was less than ₹ 5 lakh, taxpayers were given exemption under Section 87A of the Income Tax Act, due to which the entire tax liability of the taxpayer was waived off, i.e. those whose income was less than ₹ 5 lakh did not have to pay any income tax. It is also worth noting here that if the income is more than ₹ 5 lakh, then income tax will have to be paid as per the applicable slab on the entire amount above ₹ 2.5 lakh, whether you have chosen the old tax system or the new tax system. But then through the announcement made in the budget of the year 2023, the tax slab as well as the exemption limit under Section 87A were also changed. Now the benefit of this will be available to the taxpayers filing ITR for the financial year 2023-2024. They will now be given full tax exemption on income up to 7 lakh instead of 5 lakh, but its benefit will be available only to those who adopt the new tax system. Those who remain in the old tax system will have to pay income tax as soon as their income exceeds Rs 5 lakh.
So keep in mind, the old tax system will be better for those who get exemption on savings on income (life insurance, PF, PPF, children's school fees, principal repayment in home loan, etc.), savings made under NPS, house rent allowance (HRA) and interest paid on home loan under section 80C of the Income Tax Act, but for everyone else, choosing the new tax system will be beneficial.
