The budget 2023 brought significant changes in the personal tax regime. With the new regime being the default, it still allows the taxpayers to choose the old regime.
Most of the common people thought these amendments are for FY 2022-23/AY 2023-24. But, they are mistaken. These rates are applicable from FY 2023-24/AY 2024-25 onwards.
Let’s understand with a few examples.
Example 1:
Shreya has a business of gift packing. Her turnover for FY 2022-23 amounts to ₹60 lakhs annually. Expenses amount to ₹40 lakhs and hence a profit of ₹20 lakhs. She also has a rental income of ₹2 lakhs. Interest income from bank FDs is ₹50,000. She has made an investment in PPF of ₹1.5 lakhs.
What is her tax liability under the old and new regimes?
Solution:
Given that the income is for FY 2022-23. The filing of returns shall be done from 1 April 2023 till 31 July 2023. So, let’s calculate the tax liability for FY 2022-23/AY 2023-24 for Shreya.
| Particulars | Old regime Amount (in ₹) | New regime Amount (in ₹) | |
|---|---|---|---|
| Income from House Property | 2,00,000 | ||
| Less: Standard deduction of 30% | (60,000) | 1,40,000 | 1,40,000 |
| Income from Business & Profession | 60,00,000 | ||
| Less: Expenses | 40,00,000 | 20,00,000 | 20,00,000 |
| Income from Other Sources | 50,000 | 50,000 | |
| Gross Total Income | 21,90,000 | 21,90,000 | |
| Less: Deduction u/s 80C (PPF) | (1,50,000) | (0) | |
| Net Total Income | 20,40,000 | 21,90,000 | |
| Tax Liability | 4,24,500 | 3,94,500 | |
| Add: Cess at 4% | 16,980 | 15,780 | |
| Total Tax Payable | 4,41,480 | 4,10,280 |
It can be observed from the above calculation, that even after claiming the deductions in the old regime the tax liability under the new regime is lower.
Example 2:
Niyati will be a salaried individual working in TCS, Banglore from 1 April 2023. Her salary income will be ₹25 lakhs per annum. She will receive an exempt HRA of ₹2 lakhs from her employer. She also plans to invest in the share market and expects a trading income from F&O of ₹5 lakhs. She will also be paying for her senior citizen parent’s medical insurance a premium of ₹10,000 annually. She will also be eligible for a deduction u/s 80C for the investment of ₹1.5 lakhs in PPF. She has a brought forward loss of ₹1 lakh from F&O. What is her tax liability under the new and the old regime?
Solution:
The said income will be reported for FY 2023-24. The filing of returns shall be done from 1 April 2024 till 31 July 2024. So, let’s calculate the tax liability for FY 2023-24/AY 2024-25 for Niyati.
| Particulars | Old regime Amount (in ₹) | New regime Amount (in ₹) |
|---|---|---|
| Income from Salary | 25,00,000 | 25,00,000 |
| Less: HRA | (2,00,000) | (0) |
| Less: Standard Deduction | (50,000) | (50,000) |
| 22,50,000 | 24,50,000 | |
| Income from Business & Profession (F&O) | 5,00,000 | 5,00,000 |
| Less: Brought forward loss | (1,00,000) | (1,00,000) |
| Gross Total Income | 26,50,000 | 28,50,000 |
| Less: Deduction u/s 80D | (10,000) | (0) |
| Less: Deduction u/s 80C | (1,50,000) | (0) |
| Net Total Income | 24,90,000 | 28,50,000 |
| Tax Liability | 5,59,500 | 5,55,000 |
| Add: Cess at 4% | 22,380 | 22,200 |
| Total Tax Payable | 5,81,880 | 5,77,200 |
We can infer from the above table that Niyati’s tax liability is higher in the old regime, even after taking the deductions into consideration.
Conclusion:
It is always advisable to calculate tax under both regimes to opt for the most optimal one. However, be careful when you have business income, you cannot switch regimes every year.