Exemptions to rebates: Differences between old and new tax regime

Union Budget 2020 introduced a new tax regime that altered slabs and offered taxpayers concessional rates. The deadline for filing tax returns is July 31.  Let's explore the differences between the old and new tax regimes before that.

New Tax Regime

Starting April 1, 2020 (FY21), the government introduced a new optional tax rate system for individuals and Hindu Undivided Families. Those who opt for this new regime cannot avail of several exemptions and deductions, such as House Rent Allowance (HRA), Leave Travel Allowance (LTA), or Section 80C. Many taxpayers did not adopt the new tax regime for this reason. In Budget 2023, the government introduced five changes aimed at encouraging taxpayers to take up the new regime. These changes remain unchanged for FY25, as no modifications were made in the Interim Budget of 2024. The changes that were made are as follows:

Tax rate: The tax rebate was raised to Rs 3,00,000 from Rs 2,50,000 lakh starting, aiming to make the new tax regime attractive. Additionally, a highest tax rate of 30 per cent is applicable on income exceeding Rs 15,00,000.

Rebate limit: Full tax rebate on an income up to Rs 7,00,000 was introduced. The threshold is Rs 5,00,000 in the old tax regime. Individuals earning up to Rs 7,00,000 will not be liable to pay any tax under the new tax regime.

Standard deduction: Individuals are eligible to claim a standard deduction of Rs 50,000 from their gross salary income starting FY24. Family pensioners opting for the new tax regime can avail of a standard deduction of Rs 15,000 from their pension income.

Surcharge for high-net-worth-individuals: The new regime reduced the surcharge rate applicable for high-net-worth individuals. Specifically, the surcharge rate on income exceeding Rs 5 crore has been decreased from 37 per cent to 25 per cent. This adjustment will lead to a reduction in their effective tax rate from 42.74 per cent to 39 per cent.

Higher leave encashment exemption: The exemption limit for non-government workers has been increased eightfold, from Rs 3,00,000 to Rs 25,00,000.

Default Regime: Starting FY24, the new income tax regime became the default option. To continue using the old regime, you must submit the income tax return along with Form 10IEA. You will have the option to switch between the two regimes annually to check the tax benefits.

Old Tax Regime

Under the old tax regime, taxpayers have access to more than 70 exemptions and deductions, including those for HRA and LTA. The exemptions reduce your taxable income and payments. One of the most popular and generous deductions is under Section 80C, which allows for a reduction of taxable income up to Rs 1,50,000. However, taxpayers are given a choice to choose between the old and new tax regimes based on their individual financial circumstances and preferences.