Who should switch from old tax to new tax system after Budget 2024? Here’s the math

Budget 2024 has introduced higher tax exemptions in the new tax regime under which the income tax brackets have changed, making it more attractive as opposed to the old tax system. So should taxpayers who are currently opting for the old tax system switch to the new tax system in the current financial year 2024-25?

The answer is that for every taxpayer, the tax payable under the old regime will be lower under the new regime, depending on how much deduction he has to claim. This exemption level varies with income levels. Below is a table that shows the level/amount of deductions at different income levels to be claimed under the old tax regime for the same tax payable in both the regimes.

Obviously, if the amount of deductions that the taxpayer can claim at a given income level in the current financial year is more than the break-even amount shown in the table, then the old regime will still be beneficial for him. If the deductions are less than the break-even level, then the new regime will be effective.

Due to the change in income tax brackets under the new tax regime in Budget 2024, the minimum amount of deduction that can be claimed has become tax neutral in both the tax regimes.

Here is the minimum deduction that can be claimed under the old tax regime for different income levels to pay the same tax under both the tax regimes.

For the purpose of tax calculation, under the proposed new tax regime, only Rs. 75,000 (proposed in Budget 2024) is taken into consideration. On the other hand, under the old tax regime, Rs. 50,000 (as specified under the Income Tax Acts) is considered as standard deduction. The remaining deductions (i.e., along with the standard deduction of Rs. 50,000) can be other deductions that the taxpayer is eligible to claim. These include HRA tax exemption, LTA tax exemption, Section 80C, NPS investment up to Rs. 50,000, Section 80D exemption and more.

For example, the minimum/break-even deduction level for an income of Rs. 10 lakh is Rs. 3.5 lakh out of which Rs. 50,000 is considered as standard deduction and Rs. 3 lakh includes other deductions as well, which can be the sum of deductions like HRA tax deduction, Section 80C etc.

Taxpayers will have to claim more than the minimum exemption amount to pay less tax under the old tax regime as compared to the new tax regime. If the amount of deduction claimed is less than the minimum amount required, the new tax system will be more beneficial than the old tax system.

As the income level increases, we see that the minimum deduction that can be claimed increases in the old tax regime. However, once the income level exceeds Rs 15.75 lakh, the minimum deduction for higher income levels remains the same.

Before the change in income tax brackets under the new tax regime, a salaried individual would have to claim a minimum deduction of Rs 4.25 lakh under the old tax regime for an income of Rs 20 lakh to be tax neutral between the two regimes. Now this minimum deduction limit has been increased to Rs 4,83,333. The amount of deduction claimed to be tax neutral between the two tax regimes has increased by Rs 58,333 after the budget proposals.

Remember that there was no change in income tax rules, slabs and rates under the old tax system. The new tax bill proposes changes in income tax rules. The changes proposed under the new tax are as follows:

• a) Changes in income tax slabs under new tax regime
• b) Standard deduction limit increased from Rs. 50,000 to Rs. 75,000, an increase of Rs. 25,000
• c) Standard deduction for family pensioners increased from Rs. 15,000 to Rs. 25,000 – an increase of Rs. 10,000

d) Deduction on employer’s NPS contribution on employee’s account increased from the earlier 10% to 14%.

Those opting for the new tax regime will now benefit more from the change in income tax brackets.