Understanding tax regulations is crucial for every salaried individual in India, especially with the introduction of the new tax regime slabs. Since the new tax regime was introduced in Budget 2020, many taxpayers have been evaluating its impact on their take-home salary. This article aims to provide a comprehensive analysis of how the new tax slabs alter your income tax burden and consequently your net salary. Additionally, we will touch upon the implications of short term capital gain tax, which also influences your overall taxable income and financial planning.
The new tax regime offers lower tax rates across various income slabs but with significantly restricted exemptions and deductions. This combination changes the way your taxable income is computed, which directly affects your monthly salary after tax deductions. Choosing the right tax regime based on your financial situation is essential to maximise savings and optimise take-home pay. This knowledge not only helps in smart tax planning but also impacts your investment and spending decisions throughout the financial year.
What are the new tax regime slabs
The new tax regime slabs introduced in the 2020 Budget aim to simplify income tax calculations by reducing the tax rates but removing most exemptions and deductions. These slabs apply to individuals and Hindu Undivided Families (HUFs) who opt for this regime. Unlike the old tax regime where taxpayers needed to claim multiple deductions like Section 80C, 80D, and House Rent Allowance (HRA), the new slabs offer straightforward rates but limit tax planning options.
Here are the new income tax slabs for individual taxpayers below 60 years of age for FY 2023-24:
– Income up to Rs. 2.5 lakh: Nil tax
– Income from Rs. 2,50,001 to Rs. 5 lakh: 5%
– Income from Rs. 5,00,001 to Rs. 7.5 lakh: 10%
– Income from Rs. 7,50,001 to Rs. 10 lakh: 15%
– Income from Rs. 10,00,001 to Rs. 12.5 lakh: 20%
– Income from Rs. 12,50,001 to Rs. 15 lakh: 25%
– Income above Rs. 15 lakh: 30%
The new tax regime slabs attempt to reduce the complexity of tax filing and offer lower tax rates for some income brackets. However, taxpayers forego several widely used exemptions and deductions, such as investments under Section 80C, interest on housing loan under Section 24, and tax benefits on LIC premiums.
Choosing the new tax regime slabs could be beneficial for individuals with minimal investments and exemptions. However, those with substantial tax-saving investments and home loans may find the old tax regime more advantageous. It’s important to run detailed calculations or consult a financial advisor before deciding which regime results in a higher take-home salary.
How the new tax regime impacts your take-home salary
The impact of new tax regime slabs on your take-home salary depends largely on your income structure and the deductions you currently claim under the old regime. In simple terms, take-home salary is what remains after all taxes, provident fund contributions, professional tax, and other deductions.
Under the old regime, employees often claim several exemptions and deductions like HRA, Leave Travel Allowance, Standard Deduction of Rs. 50,000 and various Section 80C investments up to Rs. 1.5 lakh. These reduce taxable income considerably, thus reducing tax liability. However, in the new tax regime, most of these exemptions are not available, so taxable income can appear higher even though the tax rates are lower.
For example, consider an individual with an annual salary of Rs. 12 lakh. Under the old regime, if this person claims Rs. 1.5 lakh in Section 80C investments plus other exemptions, the taxable income could reduce to Rs. 10 lakh or less, resulting in lower tax payable. Under the new tax regime slabs, the individual cannot claim these deductions but pays tax on the full Rs. 12 lakh at lower rates.
This often leads to a scenario where the take-home salary under the new regime might be slightly lower or comparable to the old regime, depending on the amount of deductions you usually claim. Conversely, for salaried individuals who do not invest much or claim fewer exemptions, the new tax regime slabs may boost their take-home as they pay tax at reduced slab rates without the hassle of documentation.
Also, salaried employees with variable income components or those looking for simplicity in tax filing might prefer the new tax slabs to avoid complex calculations. Ultimately, understanding your specific salary structure and investment habits is vital to assess how the new tax regime slabs influence your monthly net income.
Short term capital gain tax and its relevance to the new tax regime
Short term capital gain tax is a crucial aspect often missed while analysing income taxes under any regime. It applies when you sell a capital asset like stocks, mutual funds, or property within a short period, incurring gains. For equity shares and equity mutual funds, short term capital gains (STCG) are taxed at a flat 15%. For other assets, STCG is added to your income and taxed as per your applicable slab.
Under the new tax regime slabs, while your salary income is taxed at lower rates without exemptions, the gains from short term capital assets continue to be taxed separately as per existing rules. This means STCG does not benefit from the new slabs and must be factored in while computing overall tax liability.
For instance, if you earn Rs. 10 lakh salary and Rs. 1 lakh short term capital gains from equity shares, the Rs. 10 lakh salary income is taxed per the new slabs, but the Rs. 1 lakh STCG attracts 15% flat tax, i.e., Rs. 15,000. It is important to remember that STCG is not included in your slab income but is added to your total tax bill.
This interplay makes planning for both salary income and capital gains essential. Investors should integrate their short term capital gain tax liabilities into their broader tax and investment strategy, especially in a regime where fewer deductions are available. Awareness of how short term capital gain tax coexists with the new tax slabs ensures you avoid surprises during tax filing and better manage your finances.
How to decide between the old and new tax regime
Deciding which tax regime to adopt depends on your income structure, investments, and financial goals. The new tax regime is designed to benefit those who prefer simplicity over tax-saving investments, while the old regime favours disciplined tax-saving investors.
Start by listing all your current tax-saving investments and exemptions you claim – such as Public Provident Fund (PPF), Employee Provident Fund (EPF), National Pension Scheme (NPS), insurance premiums, home loan interest, and HRA. Calculate your tax payable under the old regime with these deductions.
Then compute your tax liability under the new tax regime slabs without any exemptions but using the lower tax rates. Compare the tax amounts under both regimes to assess the impact on your take-home salary.
Also, factor in any short term capital gain tax liability you incur, as this remains separate and could impact your overall tax burden.
If the new tax regime slabs result in a lower or similar tax bill and reduce compliance burden, it might be sensible to switch. Conversely, if you benefit considerably from exemptions, continue with the old regime.
You may also consider your long-term financial strategy. The old regime incentivises saving and investment, while the new regime offers flexibility. Many taxpayers have the option to choose the regime every year, allowing you to switch based on changing circumstances.
A detailed evaluation using reliable tax calculators or consulting a tax expert will ensure you make an informed decision that maximises your take-home salary.
Conclusion
The new tax regime slabs have significantly altered how salaried individuals in India approach income tax planning. While it offers lower tax rates, the absence of numerous exemptions means your taxable income could appear higher, influencing your take-home salary. It is essential to consider your current deductions and investments before opting for the new tax regime to estimate the actual tax impact.
Moreover, understanding the role of short term capital gain tax is critical as it remains a separate element influencing overall tax liability despite the new slabs. Incorporating this into your financial planning will help avoid surprises during tax payments.
Ultimately, whether you opt for the old or new tax regime, the goal is to maximise your salary’s net value by smart tax planning. Regularly reviewing your tax situation, leveraging appropriate tax-saving avenues, and factoring in capital gains taxes will help optimise your take-home salary and financial well-being.
For Indian taxpayers, staying informed about the nuances of the new tax regime slabs and related taxes like short term capital gain tax ensures effective wealth management and smarter financial choices in the years ahead.
