New tax regime vs old tax regime post Budget 2025: These income earners may still benefit from old tax regime The benefit will be more pronounced at the bottom of the income pyramid. With no tax liability up to Rs.12 lakh, households will have more room to manage expenses, such as education, healthcare, and home loan EMIs. Find out how much you stand to save
Budget 2025 has made the new tax regime a compelling option by offering full tax exemption to those earning up to Rs.12 lakh a year, raising the basic exemption limit to Rs.4 lakh and widening the tax slabs. It has also introduced an additional 25% tax slab for incomes between Rs.20 lakh and Rs.24 lakh.#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;}
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The proposed changes could substantially increase the disposable income available to both middle-class and high-income earners. The benefit will be more pronounced at the bottom of the income pyramid. With no tax liability up to Rs.12 lakh, households will have more room to manage expenses, such as education, healthcare, and home loan EMIs. Middleclass taxpayers earning Rs.24-30 lakh a year will see their annual tax liability dip by about Rs.1.1 lakh.
However, these changes apply only to the new tax regime. The new tax regime has a higher basic exemption and standard deduction, wider slabs and lower rates. Most of the tax exemptions and deductions are, however, not available. You can’t claim exemption for house rent allowance, conveyance expenses, leave travel allowance or telephone and Internet expenses. There is also no deduction for tax-saving investments, home and education loan interest, or medical insurance premium.
Changes proposed in tax slabs
The Budget has widened the slabs and added a new one.
For many taxpayers who claim these exemptions and deductions, the old system would still mean lower taxes. “The new tax regime does indeed look attractive, but the tax could be lower under the old regime with a carefully crafted salary structure packed with tax-efficient perks,” writes Sudhir Kaushik, CEO of TaxSpanner.com (see page 4). As our calculations show, somebody earning Rs.60 lakh a year and claiming deductions and exemptions of Rs.8.5 lakh would be better off under the old regime. “Deductions and exemptions of Rs.8.5 lakh a year are not very high for someone who lives in a rented house, invests in tax-saving instruments, travels to work in a car or taxi, and has bought a medical insurance policy,” says Nishant Khemani, Managing Partner, Saturn Consulting Group.
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Even so, the new tax regime will appeal to millions of taxpayers across the income spectrum. Monali Dey is one such taxpayer. The Kolkata-based banking profesional has a tax-friendly salary structure, but is not able to avail of many exemptions available to her. She doesn’t use a car or taxi for travelling to work; so the Rs.1.2 lakh fuel transport allowance is fully taxable. With an infant child, holidaying is not possible; so the `30,000 LTA is also taxable. The only tax deductions she claims are the contribution to the NPS under Section 80C, home loan interest of Rs.1.6 lakh and medical insurance premium of about Rs.11,500.
On an income of about Rs.20.5 lakh, Dey was paying a tax of Rs.3.15 lakh. When she approached ET Wealth for guidance on tax optimisation earlier this year, Kaushik of TaxSpanner.com advised her to go for the new tax regime. The wider slabs and lower rates of the new system would cut her tax by nearly Rs.28,500 to Rs.2.86 lakh. Though taxpayers have to tell their employers which tax regime they want to go with at the beginning of the financial year, they have the option to switch when they file their returns.
When analysing her tax details, Kaushik had also advised Dey to opt for the NPS benefit offered by her employer. Under Section 80CCD(2), up to 14% of the employee’s basic salary put in the pension scheme is tax-free. If her company put Rs.15,156 (14% of her basic salary) in the NPS on her behalf every month, her annual tax would reduce by nearly Rs.57,000.
However, opting for this benefit means a lower take-home salary, and Dey was not sure if she could afford that. “I have a home loan, and other expenses leave very little surplus,” she said at the time.
Things could be different next year because the Budget proposals have put more money in Dey’s hands. Her tax outgo would decline to Rs.1.98 lakh, a saving of Rs.88,000. These savings in tax can be ploughed into the NPS, which could lower her tax further.
Though the NPS benefit is a great way to lower the tax outgo, millions of taxpayers are passing up this opportunity. The option was rolled out nearly 10 years ago, but barely 2.2 million individuals have opted for the corporate NPS model. Only a few corporates are interested in rolling out the NPS benefit and even fewer employees are willing to enrol in the scheme.
Most investors are put off by the long lock-in period and the restrictions on withdrawals on maturity. The money can’t be taken out before retirement, except in extraordinary situations. Even at maturity, only 60% of the corpus can be withdrawn while the remaining 40% has to be compulsorily invested in an annuity to earn a lifelong pension. Experts say these restrictions actually benefit the investor. “The lack of liquidity in the NPS is not necessarily bad because the money is growing at the right place. Investment returns can be enormous if held for the long term,” said Sriram Iyer, CEO of HDFC Pension.
The tax relief available for taxpayers with a total income of up to Rs.12 lakh will not be applicable against income taxed at special rates. “Taxpayers will continue to pay taxes on capital gains irrespective of the increased limit,” says Amit Maheshwari, Partner, Tax, AKM Global.
Who gains from Budget proposals?
Some salaried taxpayers may find it lucrative to move to new tax regime, while others will be better off with the old one.
MIDDLE INCOME TAXPAYERS
The high exemptions and deductions made the old tax regime more attractive for her, but the Budget has changed that. She will pay less tax in the new regime.
He also found the old tax regime less taxing but the widening of slabs and lower rates proposed in Budget have tilted the balance in favour of the new regime.
UPPER MIDDLE INCOME TAXPAYERS
The Budget has reduced the tax under the new regime, but it’s still higher than what she will pay under the old regime due to higher exemptions and deductions.
Exempt income is less than 7% of the gross income and deductions are only Rs.2.5 lakh, but they are enough to make the old regime more attractive for him.
HIGH INCOME TAXPAYER
At her income level, the exempt income is far above the threshold level that makes old regime less taxing for individuals.
Note: Calculations have factored in the standard deduction of Rs.50,000 in old regime and Rs.75,000 in the new regime, surcharge payable on incomes above Rs.50 lakh, and cess payable on total tax.
Source: TaxSpanner.com
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This story originally appeared on: India Times - Author:Faqs of Insurances
