Salaried taxpayers who use all available deductions and exemptions can reduce their tax burden significantly under the old tax regime.
The new income tax regime has become popular because the government has made income up to Rs 12 lakh per year effectively tax-free.
It is also simpler for taxpayers since there’s no need to show investment proofs. This makes filing income tax returns easier and reduces the chances of mistakes.
However, tax experts warn that salaried individuals earning up to Rs 12 lakh might end up paying more tax under the new system. This is mainly because the new regime doesn’t allow deductions.
Capital Gains May Lead to Higher Tax
According to Taxspanner CEO Sudhir Kaushik, filing tax returns is simpler in the new regime as there’s no need to provide investment proofs.
But there is a drawback when it comes to capital gains. Under the new regime, although income up to Rs 12 lakh gets a full rebate under Section 87A, this benefit does not apply to capital gains.
No Deductions or Exemptions in New Regime
Let’s understand this with an example. Suppose a person earns Rs 9 lakh per year from salary and also has Rs 70,000 in short-term capital gains.
As per the rules from July 23, 2024, short-term capital gains are taxed at 20%. So, a tax of Rs 14,000 will be charged on Rs 70,000.
On the other hand, under the old regime, one can claim deductions under sections like 80C, 80D, and exemptions like HRA, LTA, and NPS. These help reduce the total tax on the same income.
Deductions Help Reduce Tax in Old Regime
By making full use of available deductions and exemptions, taxpayers can reduce their tax significantly in the old regime.
For instance, Section 80C allows deductions on investments like PPF, ELSS, life insurance, and children’s tuition fees—up to Rs 1.5 lakh in a financial year. Section 80D gives deduction on health insurance premiums.
Section 24B allows deduction on home loan interest. HRA exemption and a standard deduction of Rs 50,000 are also available. Together, these can reduce taxable income by Rs 3–4 lakh.
Old Regime Still Better for Many in FY 2024–25
Despite the government’s push for the new tax regime, experts believe the old regime remains more beneficial for many taxpayers in the financial year 2024–25.
Niyati Shah, vertical head (personal tax) at 1 Finance, said, “Convenience should not come at the cost of higher tax. If a salaried individual qualifies for deductions, the old regime might still be the better option.”
