When determining their tax liability for FY 2022–2023, taxpayers may be perplexed as to whether to use the new tax regime or the old tax regime. A person can choose to stick with the current income tax system and utilize the current tax deductions and exemptions, or they can choose the new tax system and forego existing exemptions such as sections 80C and 80D, HRA and LTA, etc. by choosing the new tax system.
Given that choosing between the existing and new tax regimes could seem difficult, we held a discussion with Dr. Suresh Surana, founder of RSM India, to make clear for taxpayers how they might compute their tax burden under the new tax system for FY 2022–2023.
Accordingly, the said new tax regime had been made effective from FY 2020-21 (AY 2021-22) and gives an individual or HUF the option to pay income tax under section 115BAC of the IT Act at concessional slab rates subject to certain conditions. The new concessional tax regime was introduced by the Finance Act 2020 for Individual and HUF taxpayers under section 115BAC of the Income Tax Act, 1961 (hereinafter referred to as “the IT Act”).
Steps to compute tax liability under the new tax regime for FY 2022-23:
(i) Compute the Gross Income (including Income from all heads such as Salary, House Property, Capital Gains, and Other Sources)
(ii) Avail of the necessary exemptions and deductions. In case the taxpayer is opting for the new concessional tax regime, he cannot avail of the following tax exemptions and deductions under the following sections:
- 10(13A) – House Rent Allowance
- 10(5) – Leave Travel Concession
- 10(14) – Special allowance detailed in Rule 2BB (such as children’s education allowance, hostel allowance, etc. other than transport allowance, travel allowance, and daily allowance).
- 10(17) – Allowances received by MP, members of the state legislature, etc.
- 10AA – Deduction for SEZ unit
- Section 16 – Standard Deduction of Rs. 50000, Entertainment Allowance, Professional Tax
- 24(b) – Interest on borrowed loan for a Self Occupied property or Vacant Property u/s 23(2)
- 32(1)(iia) – Additional Depreciation
- 32AD – Investment Allowance for investment in Andhra Pradesh / Telangana / Bihar / West Bengal
- 33AB – Tea / Coffee / Rubber Development
- 33ABA – Site Restoration Fund
- 35(2AA) – Deduction for Payment to National Laboratory or University or IIT
- 35AD – Deduction in respect of specified business
- 35CCC – Expenditure on the agricultural extension project
- 57(iia)- Family pension
Any provision of chapter VI – A – section 80C, 80D, etc. However, Section 80CCD(2) (employer contribution on account of the employee in a notified pension scheme) can be claimed.
The taxpayer cannot set off any brought forward loss or unabsorbed depreciation attributable to the aforementioned deductions.
(iii) The taxpayer should compute the tax liability as per the rates mentioned below for the new tax regime and accordingly compute the tax under the new concessional tax regime u/s 115BAC of the IT Act.
Note 1: Rebate u/s 87A is applicable in case of a new tax regime and needs to be availed for the amount of tax payable or Rs. 12,500, whichever is lesser, resulting in NIL tax liability provided the taxpayer’s total income is up to Rs. 5,00,000
Note 2: Any resident senior citizen whose age is more than 60 years but less than or equal to 80 years has a basic exemption limit of Rs. 3,00,000. Further, any person who is a non-resident individual or HUF or super senior citizen whose age is more than 80 years has a basic exemption limit of Rs. 5,00,000.
(v) The taxpayer should also compute the tax as per the normal/ old tax regime (as per the rates mentioned above) in order to ascertain the benefits of the two tax regimes.
Further, any taxpayer availing the option under a beneficial tax regime needs to take into consideration the following:
1. The individual taxpayer availing the option u/s 115BAC would be required to file Form 10-IE along with the Income Tax return to be filed u/s 139(1) of the IT Act.
2. The Individual taxpayer may choose whether or not to exercise such an option on a year-on-year basis. However, in case of any taxpayer deriving business income, such an option once exercised cannot be withdrawn except in cases where the taxpayer ceases to have business income.
3. Individual taxpayers availing the concessional tax regime u/s 115BAC would not be subjected to Alternate Minimum Tax (AMT) provisions. Accordingly, any brought forward AMT credit cannot be set off against income u/s 115BAC of the IT Act.
Which tax regime one should choose?
Currently, the new tax regime is not widely opted by taxpayers especially those who are paying interest on self-occupied house property and makes investments eligible for deduction under sections 80C/80CCD and 80D. The basic exemption limit under both regimes is Rs. 2,50,000/– but if one adds other exemptions which are available under the old regime one will not pay tax on income approx. up to Rs. 7,50,000/- (i.e. basic exemption Rs. 2.50 lacs plus interest on self-occupied house Rs. 2 lacs plus deduction u/s 80C with 80CCD Rs. 2 lacs plus approx. Rs. 1 lac comprising of the standard deduction, Mediclaim premium, interest on saving 80TTA/80TTB, etc.) under the old regime whereas under the new regime the tax exemption is only a basic exemption.
The majority of the taxpayers who are earning income above say Rs. 10 lacs per annum will have most of the investments eligible for exemptions mentioned above, for them there is no incentive to move to the new tax regime. Unless the government increases the basic exemption limit under the new tax regime to bring parity between the two regimes, a taxpayer would continue with the old, complicated tax regime with multiple tax exemption options.