How HNIs can save tax by choosing new tax regime while filing ITR for FY 2023-24 (AY 2024-25) This change lowered the maximum marginal rate to 39% from 42.744%. As a result, high net worth individuals (HNIs) will see significant tax savings due to this amendment
Amarpal S. Chadha
Amarpal S. Chadha, Tax Partner and India Mobility Leader, EY
The Union Budget 2020 introduced the Concessional Tax Regime (CTR), also known as the New Tax Regime, to simplify the income tax framework. This initiative helps individual taxpayers, including high net worth individuals (HNIs), invest their money as they prefer without the necessity of investing in tax savings schemes and insurance plans that may not be aligned with their financial goals.
#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;} Budget 2023 introduced an increased basic exemption limit of Rs 3 lakh coupled with the revision of tax slabs under the new income tax regime.
The Union Budget 2023 also reduced the maximum surcharge rate from 37% to 25% for taxpayers opting for the new tax regime. Effectively, this lowered the maximum marginal rate to 39% from 42.744%. This amendment has resulted in significant tax savings for HNIs. The said amendments are applicable from financial year 2023-24 onwards.
The new tax regime comes with a reduced list of exemptions and deductions compared to the old regime. The idea is to offer a simplified tax structure with lower rates, thereby removing the numerous tax concessions traditionally utilised by taxpayers. Despite removing many deductions and exemptions, the new tax regime retains certain benefits like standard deduction, employer contribution to the National Pension Scheme, exemption on leave encashment etc.
Given the simplicity of the new tax regime, HNIs who often have complex income structures and investments, may find the new tax regime interesting while filing the income tax returns (ITR). The new framework offers a chance for HNIs to simplify the tax return filing process and possibly lower their income tax burden. However, HNIs should conduct a thorough review of their financial holdings and the advantages they presently enjoy under the old regime before opting for the new tax regime.
To illustrate the tax implications for the HNI, let's consider a scenario involving Mr. X.
Mr. X earns a gross salary of Rs 5.5 crore and is eligible for a House Rent Allowance (HRA) exemption amounting to Rs 4.5 lakh. Further, Mr. X has made the following investments:
Life insurance premium: Rs. 1 lakh (Deduction under section 80C)Investment in equity-linked mutual fund: Rs. 50,000 (Deduction under section 80C)Medical premium of Rs. 50,000 (Self and parents) (Deduction under section 80D)Investment in NPS: Rs. 50,000 (Deduction under section 80CCD(1B))Below is the tax calculation under the old regime and new regime:
The provided example demonstrates that by choosing the new tax regime, Mr. X could achieve tax savings of up to Rs. 18,79,944, despite being entitled to total deductions or exemptions amounting to Rs. 7,52,400. In scenarios where an individual's income exceeds Rs. 5 crores, the new tax regime is likely to be the more advantageous option, primarily due to the decrease in the surcharge rate from 37% to 25%.
Even though the new tax regime is the default regime, it offers flexibility to decide each financial year whether to continue with the new regime or opt for the old regime. The decision to select the tax regime needs to be analysed based on the income structure, investment decisions, and changes in the financial landscape.
With the cap on surcharge at 25% under the new tax regime, it emerges as a financially advantageous model for HNIs, enabling them to save a considerable amount on taxes. It simplifies the income tax return filing process, reduces the burden of document maintenance, lowers the likelihood of litigation and saves time.
Outlined below are the income tax slabs and corresponding rates under both the old and new tax regimes. You can compare your tax savings under both tax regimes to determine the more beneficial option for you.
(The author is Tax Partner and Mobility Leader, EY India; Shanmuga Prasad, Director, EY India also contributed to the article.)
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This story originally appeared on: India Times - Author:Faqs of Insurances
