Taxation is an essential aspect of any country’s financial system, impacting every individual’s financial planning. Recently, the Finance Ministry announced updates regarding the income tax regime for the financial year 2024-25. It’s crucial for taxpayers to comprehend these changes, especially concerning the new tax regime, its opt-in process, and how it differs from the old one.
The new tax regime, introduced by Union Finance Minister Nirmala Sitharaman in the Union Budget 2023-24, brings significant alterations to the income tax structure. One of the key modifications is the increase in the basic exemption limit to ₹3 lakh from ₹2.5 lakh. Additionally, the rebate under Section 87A of the Income Tax Act has been raised to ₹7 lakh from ₹5 lakh. This implies that individuals earning up to ₹7 lakh annually will receive a full tax rebate, relieving them from paying any income tax.
Understanding how to opt for the new tax regime is crucial for taxpayers. For individuals other than companies and firms, the new tax regime automatically applies from the financial year 2023-24, corresponding to the assessment year 2024-25. However, individuals have the flexibility to opt for the old regime if they find it more advantageous for their financial situation.
Opting for the old regime grants taxpayers access to various deductions and exemptions not available in the new regime. These include deductions for expenses like house rent allowance (HRA), leave travel allowance (LTA), and contributions to schemes under Sections 80C, 80D, 80CCD(1b), and 80CCD(2). On the contrary, the new regime offers lower tax rates but lacks these deductions and exemptions. It simplifies the tax structure but may not be as beneficial for individuals who heavily relied on these deductions under the old regime.
Moreover, the old tax regime provided different basic income exemption limits based on the taxpayer’s age. For individuals below 60 years, the basic exemption limit was ₹2.5 lakh, while it was ₹3 lakh for those aged 60 and above but below 80. Senior citizens aged 80 years and above enjoyed a basic exemption limit of ₹5 lakh. However, under the new regime, these varied limits are consolidated into a single ₹3 lakh basic exemption limit for all taxpayers.
Understanding the new tax regime is an opt-in process, and its disparities with the old regime is crucial for every taxpayer. While the new regime simplifies tax computation with lower rates, it eliminates several deductions and exemptions provided by the old regime. Taxpayers must evaluate their financial circumstances carefully before opting for either regime to ensure they maximize their tax benefits effectively.
