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In a financial year, salaried individuals have an option to either continue with the old income tax regime and claim the deductions and tax exemptions, or to opt for the new income tax regime but forgo approximately 70 tax deductions and exemptions.
The new income tax regime was announced in Budget 2020 and became effective from April 1, 2020. According to the income tax laws, a salaried individual is required to choose between the new and old income tax regimes every financial year. This means that a salaried individual (having no business or professional income) can choose the old income tax regime in one year and the new income tax regime the next year, depending on the taxes payable in that particular year. A salaried taxpayer must compare the income tax payable in both the tax regimes to ascertain which tax regime has lower outgo.
If opting for old income tax regime
An individual opting for the old income tax regime in FY 2022-23 must understand their salary structure. There are certain tax exemptions that can be claimed from salary income. These include tax exemptions on house rent allowance (HRA), leave travel concession (LTC) and a standard deduction of Rs 50,000.
Further, apart from salary income, an individual may have other incomes as well. Examples of these are interest income received from savings accounts, fixed deposits and dividends.
Here is an example of how one can claim tax exemptions and arrive at a gross taxable income under the old tax regime.
Calculation of gross taxable income in old tax regime | |
Particulars | Amount (Rs) |
Gross salary income | 10,00,000 |
Less: House rent allowance (HRA) exemption | 2,40,000 |
Less: Standard deduction | 50,000 |
Net salary income | 7,10,000 |
Add: Interest income from savings accounts | 7,000 |
Add: Interest income from fixed deposits | 8,000 |
Add: Dividends from equity shares | 5,000 |
Gross taxable income | 7,30,000 |
Similarly, if an individual has taken a home loan, then an exemption can be claimed under Section 24 for interest paid on housing loan. The maximum exemption of Rs 2 lakh can be claimed under the head "income from house property".
After claiming tax exemptions from salary income and adding other incomes such as dividends, interest income from savings account, fixed deposits, etc, one arrives at gross taxable income.
From this gross taxable income, a salaried individual is required to claim eligible deductions to arrive at net taxable income. On this income, one will calculate the income tax payable under the old tax regime.
Some of the commonly availed tax deductions are Section 80C deduction of Rs 1.5 lakh, Section 80D deduction for medical insurance paid - Rs 25,000 for self, spouse and children and Rs 50,000 for senior citizen parents - Section 80CCD (1b) for investment of Rs 50,000 in the National Pension System (NPS), Section 80TTA on interest earned from savings accounts (maximum of Rs 10,000) and so on.
Here is a look at the calculation of deductions:
Claiming deductions and calculating tax payable in old tax regime | |
Particulars | Amount (Rs) |
Gross taxable income | 7,30,000 |
Less: Section 80C deduction | 1,50,000 |
Less: Section 80D deduction | 25,000 |
Less: Section 80CCD (1b) | 50,000 |
Less: Section 80TTA | 7,000 |
Net taxable income | 4,98,000 |
Income tax payable | 12,400 |
Less: Rebate u/s 87A | 12,400 |
Cess on income tax amount | 0 |
Final tax amount | 0 |
In the table above, by claiming deductions, the individual has brought the net taxable income to below Rs 5 lakh. This has made him eligible for a rebate of Rs 12,500 under Section 87A. Thus, an individual will not be required to pay any taxes on a salary income of Rs 10 lakh if they are able to claim all the deductions and tax exemptions mentioned above.
If individual opts for new income tax regime
As the new income tax regime does not allow an individual to claim common tax exemptions and deductions, one can directly calculate the tax payable on the gross taxable income.
Income tax laws allow a deduction under Section 80CCD(2) for those following the new tax regime. Section 80CCD(2) deduction is claimed if an employer has made an NPS contribution to an employee's account. Private sector employees can claim a maximum deduction of 10% of salary, whereas government employees can claim a maximum deduction of 14% of salary.
Here is a look at the tax calculation under the new regime:
Calculating income tax payable under new tax regime | |
Particulars | Amount (Rs) |
Gross salary income | 10,00,000 |
Add: Interest income from savings accounts | 7,000 |
Add: Interest income from fixed deposits | 8,000 |
Add: Dividends from equity shares | 5,000 |
Gross taxable income | 10,20,000 |
Income tax payable | 79,000 |
Add: Cess @ 4% | 3,160 |
Final income tax amount | 82,160 |
Table 3 shows the calculation for an individual who has opted for the new income tax regime. They are not eligible for HRA tax exemption, standard deduction from salary income. Further, they cannot claim common deductions under sections 80C, 80D, 80CCD(1b), 80TTA, etc.
Due to this, this individual's gross taxable income is higher under the new income tax regime than under the old income tax regime. This has led to a higher income tax outgo in the new income tax regime when compared with the old regime.
Do note that Budget 2023 has announced changes in the income tax slabs for the new tax regime. The new income tax slabs and rates under the new tax regime will be applicable for incomes earned in the financial year 2023-24 (starting from April 1, 2023). Any incomes earned in the current financial year (FY 2022-23) will be charged at the tax rates applicable for FY 2022-23.
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