The Union Budget 2023 introduced several changes to the new tax regime slabs under India’s Income Tax framework. These changes aim to make the new tax regime attractive by revisiting income slabs, lowering taxable percentages, and providing additional benefits to taxpayers. Understanding the potential savings requires a closer look at the revised slabs and comparing the new regime with the old one based on individual earning patterns and investment habits, such as utilizing tax-saving tools like Equity Linked Savings Scheme (ELSS) mutual funds.
The government’s push toward the new tax regime makes it crucial for taxpayers to assess how much they could potentially save under the revised framework. This article dives into the specifics of the new tax regime slabs, explains the calculations for different income levels, and explores considerations for individuals who might be accustomed to relying on the old regime’s exemption mechanisms.
New Tax Regime Slabs for FY 2023-24
Under the revised new tax regime, income slabs have been adjusted significantly. The updated details include the following:
Income Slabs (Annual) Tax Rate under New Regime
₹0 ₹3,00,000 Nil
₹3,00,001 ₹6,00,000 5%
₹6,00,001 ₹9,00,000 10%
₹9,00,001 ₹12,00,000 15%
₹12,00,001 ₹15,00,000 20%
Above ₹15,00,000 30%
The revised tax regime also provides a standard deduction of ₹50,000 for salaried individuals and pensioners. Importantly, the new tax regime does not allow for exemptions or deductions available in the old tax regime, such as Section 80C benefits, including ELSS mutual funds, PF contributions, home loan principal repayment, and others.
Comparing the New and Old Tax Regimes
To understand the savings potential, let’s compare the two tax regimes for a salaried individual earning ₹15,00,000 annually and calculating tax liability:
Case 1: Old Tax Regime
Assumptions:
The individual invests ₹1,50,000 in ELSS mutual funds under Section 80C.
A standard deduction of ₹50,000 is levied.
Other exemptions are factored, such as HRA, totaling ₹1,00,000.
Taxable Income = ₹15,00,000 ₹1,50,000 ₹50,000 ₹1,00,000
Taxable Income = ₹12,00,000
Tax Liability Based on Old Slabs:
₹0 to ₹2,50,000: Nil
₹2,50,001 to ₹5,00,000: 5% = ₹12,500
₹5,00,001 to ₹10,00,000: 20% = ₹1,00,000
₹10,00,001 to ₹12,00,000: 30% = ₹60,000
Total Tax Payable = ₹12,500 + ₹1,00,000 + ₹60,000 = ₹1,72,500.
Case 2: New Tax Regime
Assumptions:
No exemptions or deductions (except ₹50,000 standard deduction).
Taxable Income = ₹15,00,000 ₹50,000 = ₹14,50,000
Tax Liability Based on New Slabs:
₹0 to ₹3,00,000: Nil
₹3,00,001 to ₹6,00,000: 5% = ₹15,000
₹6,00,001 to ₹9,00,000: 10% = ₹30,000
₹9,00,001 to ₹12,00,000: 15% = ₹45,000
₹12,00,001 to ₹14,50,000: 20% = ₹50,000
Total Tax Payable = ₹15,000 + ₹30,000 + ₹45,000 + ₹50,000 = ₹1,40,000.
Savings Under New Tax Regime:
₹1,72,500 (Old Regime) ₹1,40,000 (New Regime) = ₹32,500
In this scenario, the new tax regime yields potential savings of ₹32,500 for a salaried individual earning ₹15,00,000 annually.
ELSS Mutual Funds and the New Tax Regime
Equity Linked Savings Scheme (ELSS) mutual funds were traditionally a favored tax-saving tool under Section 80C of the old tax regime. Apart from its primary benefit of reducing taxable income, ELSS mutual funds offer the potential for wealth creation through equity investments, making it attractive for long-term financial planning.
However, under the new tax regime, no deductions under Section 80C are allowed, which means the tax-saving advantage of ELSS mutual funds is lost. Investors who routinely rely on ELSS mutual funds for tax optimization must factor this into their decision-making when choosing between the two regimes.
Despite this, ELSS mutual funds remain a compelling investment option for individuals looking for growth in the equity market with the added advantage of a short lock-in period of three years compared to other tax-saving instruments.
Factors to Consider Before Making a Decision
The choice between the new and old tax regime depends primarily on two factors:
1. Income Composition: Salaried individuals with significant exemptions and deductions may still find the old tax regime advantageous. On the contrary, individuals with fewer exemptions or income from other sources may benefit from the new regime.
2. Investment Habits: The old regime encourages structured savings through tax-saving tools like ELSS mutual funds, PPF, or NSC. The new regime’s simplicity eliminates these obligations, which might be suitable for those who prefer straightforward taxation.
Summary
The revised new tax regime slabs aim to simplify taxation and provide savings opportunities for taxpayers. Under the new regime, income up to ₹3,00,000 is tax-free, while reduced rates apply to income above this level, making it appealing for individuals with limited investments and exemptions. By comparing the old and new tax regimes for different income levels, taxpayers earning ₹15,00,000 annually could save up to ₹32,500 under the new regime slabs.
However, the absence of exemptions like Section 80C benefits, including ELSS mutual funds, might deter taxpayers who rely heavily on structured savings. While ELSS mutual funds remain attractive as an investment tool, their tax-saving advantage diminishes under the new tax regime.
Taxpayers must evaluate their income composition, investment patterns, and lifestyle choices before deciding between the regimes. It is advisable to consult a professional to understand the implications thoroughly.
Disclaimer
The calculations above are based on specific assumptions and scenarios. Individual circumstances may vary, and other factors might influence tax savings. Investors and taxpayers are advised to consider all factors, including exemptions, deductions, and financial goals, before choosing a tax regime. Additionally, investment in ELSS mutual funds or any financial instrument involves market risks. It is essential to carefully gauge the pros and cons of trading in the Indian financial market and consult a professional financial advisor or tax consultant for tailored guidance.
