Daybreak - Is the new tax regime for everyone?

Episode Date: February 2, 2024

When the govt of India came up with the budget, taxpayers were given 2 options: move to the new tax regime or continue with the old one. The tax rates in the new regime were clearly lower.But despite this, most chose to stick to the old regime. Even with comparatively higher tax rates the old tax regime has remained popular amongst Indian taxpayers.Tune in.Daybreak is produced from the newsroom of The Ken, India’s first subscriber-only business news platform. Subscribe for more exclusive, deeply-reported, and analytical business stories.   

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcasts, you've probably heard me, my interruptions, my analogies, and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too. It's for a special announcement. For the last few months, I and Sita Raman Ganesh, my colleague and the Ken's deputy editor, have been working on an ambitious new podcast. It's called Intermission.

We want to tell the secret sauce stories of India's greatest companies. Stories of how they were born, how they fought to survive, how they build their organizations and culture, how they manage to innovate and thrive over decades, and most importantly, how they're poised today. To do that, Sita and I have been reading books, poring over reports, going through financial statements, digging up archives, and talking to dozens of people. And if that wasn't enough, we also decided to throw in video into the mix. Yes, you heard that right. Intermission has also had to find its footing in the world of multi-camera shoots in professional studios, laborious editing, and extensive post-production. Sita and I are still reeling from the intensity of our first studio recording.

Intermission launches on March 23rd. To get alert, as soon as we release our first video. episode, please follow intermission on Spotify and Apple Podcasts or subscribe to the Ken's YouTube channel. You can find all of the links at the ken.com slash I am. With that, back to your episode. When the government of India came up with the budget, taxpayers were given two options. Move to the new tax regime or continue with the old one. The tax rates in the new regime were clearly lower. But despite this, most chose to stick to the old regime. Less than 1% of the taxpayers who file their returns through the clear tax portal this year opted for the new regime.

And the reason for this is actually quite clear. The old tax regime offers a bunch of deductions and exemptions that can reduce the taxable income of taxpayers quite significantly. You are probably familiar with some of them, like Section 80C, which allows you to allows income deduction on investments up to 1.5 lakh rupees a year. There is also Section 80D which has to do with health insurance premiums. And then there is Section 24 of course, which is related to interest on home loans. We also have the standard deduction on salary and house rent allowance. So even if the tax rates were higher, the old tax regime meant lesser taxes for most taxpayers.

Obviously, the government was not very happy about this. Karun Bajaj, who recently retired as Revenue Secretary, had said in the past that the old tax regime with its deductions must go, and that the new simple tax regime needs to be incentivized. So a lot of hopes were pinned on this year's budget. On one hand, there were long-pending demands regarding the old tax regime. This included increasing deduction limits under Section 80C and Section 80D to keep up with inflation over the years,

rationalization of tax slabs and rates and other tax breaks. And on the other hand, people were hoping for what Bajar had said, that the government come up with changes that would make the new tax regime more attractive. Turns out, the government has done exactly that. The one that's been making all the headlines, of course, is the decision to increase the income level on which no tax will be payable. From the earlier 5 lakh rupees, the government has raised it to 7,000. So should you opt for the new regime then?

Not so fast. There are also a lot of other changes that we need to understand first. Welcome to Daybreak, a business podcast from the Ken. I'm your host, Nick Dha Sharma, and I don't chase the news cycle. Instead, thrice a week on Mondays, Wednesdays and Fridays, I will come to you with one business story that is worth understanding and worth your time. I understand what is happening with the new and the old tax regime and which one we should opt for, we need to get one thing straight.

A lot of how these changes work out for you depends on how much money you make and the kind of tax breaks you prefer. So let me take you through some of the big changes one by one. Like I mentioned earlier, those with the taxable income of up to $7,000,000, will not have to pay any tax in the new tax regime. This is thanks to a rebate,

which is basically like a payback, which means that the tax liability is first calculated and then rebated or paid back. So far, this rebate was for those with taxable incomes up to 5 lakh rupees in both the old and the new regimes. But from the next financial year, which begins in April, this has been increased to 7 lakh rupees. Again, this is only for those who opt for the new regime.

So what is the purpose of this difference of 2 lakh rupees? With it, the government is basically trying to bridge the current gap that exists between the two regimes. And how is it doing that? Well, those in the old tax regime with incomes up to $7,000 000 can bring down their taxable income to $5,000 and escape tax. This is through popular deductions such as Section 80C and the national pension scheme investment.

So the higher ceiling for the new tax regime is essentially a way to level this playing field. Let us now look at the next change. In the new regime, the government, has decided to extend the benefit of a 50,000-R-R-Pest standard deduction for salaried and pension taxpayers. Before this, this was available only in the old tax regime. Again, this is another way to reduce taxable income in the new regime and bring it on par with the old one. And now moving on to the other change.

The key USP of the new tax regime until now has been the lower tax rates and the favourable tax slabs that it offers compared to the old regime. The government has tried to make it even more attractive. For one, the tax exemption limit in the new regime has been increased from 2.5 lakh rupees to 3 lakh but in the old one it is still 2.5 lakhs. Also, the government has tried to simplify taxes in the new regime. It has reduced the number of tax slabs from 6 to 5. The tax rates in these labs too have been moderated. This in turn will reduce the tax liability for this. those in the new tax regime even more. And finally, coming to the last change that has raised quite a few eyebrows.

This one applies to the super-rich. As it turns out, it is not just the lower income and middle-income category that the government wants to shift to the new regime. From April onwards, the surcharge on tax has been reduced from 37% to 25% for those with incomes above 5 crore rupees. But again, this is only applicable to this. those in the new tax regime. And it's a pretty good incentive because it brings down the highest effective tax rate for the super rich from about 43% to 39%. So if your income is on the highest side,

it may be worth it for you to switch to the new regime. Coming up next, is the new tax regime for everyone? As Arnan says, sure, a lot of distance has been covered in making the new regime more attractive, but for many, it will still not be quite enough. Think of this. Despite the higher rebate in the new regime, if you compare, the old regime still has many more tax breaks that are not available in the new one. To name a few, you have the tax breaks on health insurance premiums, house rent allowance, interest on home loans, interest on bank deposit interest, interest on education loans, and many more. Also, an important point to remember is that, is that the rebate in the new regime is applicable only if the taxable income is up to $7,000.

Anything more than that has no benefit of the higher rebate. So all these deductions and exemptions could still mean that you could pay less taxes under the old regime. But whether you should go for the new tax regime or the old one will change on a case-to-case basis. There are a bunch of factors to be taken into account like your income levels and the tax breaks that you use. But there's one great piece of advice from Anand that applies to all of us. Even if you decide to opt for the new tax regime and certain investments may not give you a tax break anymore, do not stop them. Tax breaks or no tax breaks, savings, investments and financial protection should never go out of fashion. Daybreak is produced from the Newsroom

of the Ken, India's first subscriber-focused business news platform. What you're listening to just a small sample of our subscriber-only offerings. A full subscription unlocks daily long-form feature stories, newsletters, subscriber-only apps and podcast extras. Head to the ken.com and click on the red subscribe button on the top of the website. I am Snigda Sharma, your host, and today's episode was edited by my colleague Rajiv Sien.