New tax regime: Know your slab

The revised income tax framework is anticipated to become the favoured choice for many taxpayers in the forthcoming financial year, following the proposals outlined in the Union Budget 2025. Taxpayers have received favourable news from Finance Minister Nirmala Sitharaman, as income tax rates have been reduced and tax brackets have been further streamlined.

The basic exemption threshold, which denotes income that is not subject to taxation, has been raised to Rs 4 lakh. Individuals earning up to Rs 12 lakh will not incur any tax liabilities under the new framework, thanks to the enhanced tax rebate provided under Section 87A. Furthermore, salaried individuals with an annual income of Rs 12.75 lakh will also be exempt from tax, considering the standard deduction of Rs 75,000 applicable in the new regime.

High-income earners, those with annual earnings exceeding Rs 24 lakh, will also experience advantages under the new system, potentially saving Rs 1.1 lakh in taxes each year.

Who stands to gain?

The modifications in the new tax structure will offer a big relief to middle-class taxpayers, especially those who previously depended on deductions and exemptions to mitigate their tax obligations. With broader tax brackets, many individuals will discover that their overall tax liabilities are lower, even in the absence of these benefits.

For example, Rajeev Sharma, an IT professional based in Mumbai with an annual income of Rs 20 lakh, utilized deductions under Sections 80C, 80D, and HRA to lower his taxable income under the old regime, which necessitated extensive financial planning.

In contrast, under the new framework, with an increased basic exemption and updated tax brackets, his tax liability will decrease by Rs 30,000 without the need for optimizing deductions.

The new income tax regime also proves advantageous for those earning between Rs 12 lakh and Rs 24 lakh. For instance, Ritu Arora, a marketing executive in Bengaluru, previously paid Rs 3.2 lakh in taxes on her Rs 22 lakh salary under the old tax regime after accounting for deductions. However, under the new tax structure, her tax obligation will now be reduced by nearly Rs 50,000.

Income bracket of Rs 24-50 lakh

The recent reforms not only favour middle-income taxpayers but also provide advantages to higher-income groups. Individuals with earnings ranging from Rs 24 lakh to Rs 50 lakh will now experience an annual tax saving of Rs 1.1 lakh.

For instance, consider Akash Mehta, a business consultant based in Delhi, who earns Rs 35 lakh. In the past, he utilized deductions for home loan interest, NPS contributions, and insurance premiums to mitigate his tax burden. However, with the newly structured tax slabs, he will benefit from tax savings without the need for further investment strategies.

Although he will forgo certain exemptions, his annual tax savings will still reach Rs 85,000.

Old versus new tax regimes

Which option is more advantageous for you?

Despite the benefits, the new regime may not be suitable for everyone. Taxpayers with significant deductions, such as high home loan interest and corporate NPS contributions, may find the previous regime more beneficial.

Take Meghna Sinha, a senior banking executive with an annual income of Rs 60 lakh. Her deductions and exemptions amount to Rs 8.5 lakh, derived from her investments, home loan interest, and tax-saving schemes. Even with the new tax slabs, her tax liability remains approximately Rs 84,000 lower under the old regime.

In summary, while the new tax regime presents improved benefits compared to the past, taxpayers should carefully evaluate their financial situations before deciding to switch.

Tax experts suggest that individuals with few deductions are likely to gain the most from the new system, whereas those with substantial exemptions and higher incomes may still prefer the old tax structure.