Alok Agrawal: Why new tax regime has become more attractive for FY23-24? Alok Agrawal explains
If we are in old tax regime tax payer how can we include one of the best tax saving instruments.
The first assumption here is that in order to take benefit of these tax saving investments and other kind of payments, I need to be in the old tax regime even for the financial year ending March 2023. If I had determined after comparing the two scenarios that I am better off under the new tax regime, then obviously all these are going to be irrelevant for me. But let us talk about those individuals who had determined that they are going to be better off under the old tax regime. So, let us say overall exemptions and deductions over more than 2.5 lakhs generally those taxpayers would be better off. So, for those individuals if they have not already done whatever they could in terms of section 80C deduction or 80CCD deduction or 80G as you said or 80D for health insurance, they can still do it to the extent it is practically feasible.
There still are four days left for the end of this year. They can also look at what was considered by the employer from a payroll withholding perspective in order to determine the balance that they need to invest because as we all know the total limit under section 80C is only 1.5 lakhs.
Let us also talk about the major changes. I think it is very important for us to brush up the new tax regime and the kind of tax slabs now which are as per the new tax regime for all those investors who maybe want to sit and decide as to what kind of tax regime is better for them. So, if you could just revise the tax labs and the kind of benefits we are getting in the new tax regime.
Like we had discussed after the budget announcements for people under the new tax regime, it has become a relatively more attractive situation in FY23-24 as compared to the new tax regime for let us say FY22-23. So, one is you have a higher rebate for income up to 7 lakhs per annum. So, if you have income up to that plus you get a standard deduction as well, so 7,50,000 effectively, you will not have any taxes. Then, the other end of the spectrum which is very high income taxpayers above 5 crores, they also have a big benefit under the new tax regime because now the surcharge is limited to 25% as compared to 37%. But this is again under the new tax regime. Now there are some benefits even in between, so let us say for the 12.5 to 15 lakh, earlier it was 25% and now it is 20%. So effectively there is some tax saving. Again, if I have to give an overall number, you have a total of let us say 3.75 lakhs of exemptions and deductions plus you are getting 50,000 of standard deductions, so 4.25 lakhs in all. If you have that or more, then you are again better off under the old tax regime. So, the two main changes as we discussed was that standard deduction was allowed under the new tax regime and you have a deduction of up to 15,000 even for family pension. So, these are the main changes as far as the new tax regime is concerned.
And the other thing as you rightly said is unlike FY22-23, in FY23-24 the new tax regime becomes a default. So, let us say from an employer TDS purpose, the employer will automatically consider the new tax regime unless as an employee I submit my choice to the employer that I want to stay under the old tax regime for FY23-24.
One last question to you on the benefit that one will lose on debt mutual funds. How to make the most of it and how to make the most of this time till 31st if at all you want to invest in fixed income like a debt mutual fund? Will we be getting the benefit of LTCG plus indexation if we do it before 31st?
That is right. So, this was something which was introduced in the final finance bill that was passed a few days ago, now becoming the law of the land. So, what they have done is they have added debt mutual funds along with market-linked debentures to treat both in a similar manner and now both will be taxed as short-term capital gains regardless of the holding period. But this change is effective only for investments made from April 1, 2023, and therefore, if you make investments into debt mutual funds and we have to be clear about the categorisation as well of debt mutual funds, so we are talking about where the equity holding in domestic companies is 35% or less. If we are doing that, then you will still get the three-year period to make it a long-term gain. You will get the 20% indexation, but if you are making those investments from 1st April onwards, then as we discussed it is all going to be short-term gain similar to what was proposed in the budget for market-linked debentures.
