Your income tax is most likely to change in the days to come. In her budget address, Finance Minister Nirmala Sitharaman made significant announcements for hard-working middle-class taxpayers. These are known as new income tax slabs, and the Center has decided to make them the default tax regime. The previous income tax slab regime, however, is still in operation. So, while paying their taxes, taxpayers now have a choice between the two regimes. But which one is better?
New Tax Slabs Regime
First, the finance minister clarified the rebate on Rs 5 lakh income that is tax-free under both the old and new tax systems. This is about to change!
According to Sitharaman's proposal, a taxpayer will not be obligated to pay any tax on income up to a maximum of Rs 7 lakh under the new tax system.
She also suggested reducing the number of tax slabs in this regime to five and increasing the tax exemption limit to Rs 3 lakh.
Hence, the new revised tax rates are:
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Income slab of Rs 3 lakh: No tax levied
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Income of Rs 3 lakh to Rs 6 lakh: 5% tax rate
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Income of Rs 6 lakh to Rs 9 lakh: 10% tax rate
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Income of Rs 9 lakh to Rs 12 lakh: 15% tax rate
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Income of 12 lakh to Rs 15 lakh: 20% tax rate
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Above Rs 15 lakh income: 30%
Additionally, the FM has suggested reducing the surcharge rate from 37% to 25% on the country's highest tax rate, which is among the highest in the world at 42.74%. The maximum rate would be 39% once the surcharge rate is reduced.
Also, FM suggested extending the standard deduction benefits to the new tax regime. Thus, each salaried individual earning at least Rs 15.5 lakh will stand to gain Rs. 52,500.
But FM said, "Moreover, we are declaring the new income tax regime as the default tax system. However, citizens will still be able to choose to benefit from the old tax regime."
In the previous new tax regime, no tax was levied on income to Rs 2.5 lakh. Other tax rates were:
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Income Rs 2.5 lakh to Rs 5 lakh: 5% rate
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Income Rs 5 lakh to Rs 7.5 lakh: 10% rate
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Income Rs 7.5 lakh to Rs 10 lakh: 15% rate
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Income Rs 10 lakh to Rs 12.5 lakh: 20% rate
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Income Rs 12.5 lakh to Rs 15 lakh: 25% rate
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Above Rs 15 lakh income: 30% rate
Old Income Tax Slabs
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Income up to Rs 2.5 lakh: Exempted from tax
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Income of Rs 2.5 lakh to Rs 5 lakh: 5% tax rate
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Income of Rs 5 lakh to Rs 10 lakh: 20% tax rate
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Income of above Rs 10 lakh: 30% tax rate
Which one is better?
Without any deduction claims, the new tax regime is beneficial based on calculations made by some top software platforms for tax and financial services. Under the new tax regime, a taxpayer saves more money on taxes. It should be stressed that there will be no deductions like there were under the old regime.
Under section 87A of the IT Act, a tax credit is available up to an income of 5 lakh rupees under the old regime. The maximum rebate is around 12,500. This rebate is now added to income tax that is payable over Rs 5 lakhs. Therefore, only the income class with a salary of Rs 5 lakh is not required to pay taxes.
