New tax regime tweaked: Here's how to save up to Rs 17,500 a year in income tax

New tax regime tweaked: Here's how to save up to Rs 17,500 a year in income tax

Finance Minister Nirmala Sitharaman in Union Budget 2024 announced an increase in the standard deduction from Rs 50,000 to Rs 75,000 and made minor adjustments to the tax slabs under the simplified New Tax Regime (NTR). These measures will offer individual taxpayers a tax benefit of up to Rs 17,500 per year under the NTR.

Top bracket savings

Taxpayers in the highest bracket, with a taxable income of Rs 15 lakh or more, will save Rs 7,500 due to the enhanced standard deduction limit under the NTR. Additionally, rate rationalisation will lead to further savings of Rs 10,000 for this group, totalling Rs 17,500 in savings.

All taxpayers with a taxable income above Rs 12 lakh will benefit from rate rationalisation, saving Rs 10,000. However, their savings from the increased standard deduction will be less than those in the top bracket, as these savings are based on the applicable income tax rate, which varies across income groups.

Previously, those with a taxable income between Rs 3-6 lakh paid income tax at 5 per cent. The FM has adjusted this slab to Rs 3-7 lakh. Similarly, the 10 per cent tax rate slab has been changed from Rs 6-9 lakh to Rs 7-10 lakh, and the 15 per cent tax rate slab has been modified from Rs 9-12 lakh to Rs 10-12 lakh.

The Old Tax Regime (OTR) remains unchanged in the Union Budget 2024-25. The additional savings offered under the NTR are seen as an effort to make the new regime more attractive to salaried taxpayers. The government has been working to position the simple and exemption-free NTR as the preferred choice for salaried individuals.

Easing tax process

In a post-Budget media interaction, Sitharaman stressed the government's goal to simplify the income tax system and broaden the tax base. She noted that the simplified NTR is a part of this strategy. When asked about the potential phasing out of the OTR as part of a comprehensive review of the Income Tax Act, Sitharaman said that no decisions could be made until the review is complete.

While the government has tweaked the NTR to make it more appealing, the OTR remains untouched.

Comparing NTR and OTR

Recent adjustments to the NTR have brought the tax outgo closer to what one pays under the OTR after availing all deductions. For an individual with a taxable income of Rs 15 lakh and availing the maximum deduction of Rs 4.75 lakh, the tax outgo under the OTR stands at Rs 111,800. 

Previously, under the NTR (2023-24), the tax outgo was higher by Rs 33,800. However, after Tuesday’s changes, the tax outgo under the NTR is now higher by only Rs 18,200. Notably, if the deduction claimed is limited to Rs 4 lakh under the OTR, the taxpayer would save Rs 2,600 in the NTR.