The new tax regime has become the default option for taxpayers from Budget 2023 for the financial year 2023-24. As we already know, the new regime eliminates most of the deductions and tax advantages enjoyed by the old regime. Certainly, the old tax regime is still accessible to taxpayers.
Here we highlight the lesser known aspects of the new tax regime and how it could be beneficial, considering the reduction in surcharges and higher rebates, in addition to indicating the operational aspects on how to waive a option.
Reduced supplement
For the assessment year (AY) 2024-25, under the old regime, the surcharge rate applicable to income tax for individuals whose total income (income after all deductions) is more than ₹5 crore is 37 per cent. This takes the maximum marginal tax rate (MMRT) after health and education allowance (HEC) from 4 per cent to 42.74 per cent. However, the surcharge rate of income tax applicable to such individuals under the new regime has been notified at 25 per cent in the Finance Act, 2024. This takes the MMRT under the new regime to 39 per cent.
It is to be noted that the maximum rate of gross-up on the portion of total income comprising dividends, short-term and long-term capital gains from sale of shares, units of equity-oriented mutual funds, etc. and long-term capital gains from sale of other fixed assets remains capped at 15 per cent under both the schemes. Thus, it can be said that the MMRT for these four categories of income is the same under both the schemes, i.e. 35.88 per cent.
Marginal relief on rebates
The rebate under Section 87A in case of new regime allows zero tax liability, if the total income reaches ₹7 lakh. What happens if the total income slightly exceeds ₹7 lakh? To relieve the taxpayers from such a situation, the section offers marginal relief, unlike the old regime. But there are a few conditions to be fulfilled to avail the marginal relief.
First, the total income is expected to exceed ₹7 lakh. Secondly, the tax on total income (before adding HEC) should be more than the total income above ₹7 lakh. If both conditions are met, then the reduction with marginal relief effect is calculated as follows: tax on total income (before HEC) less total income above ₹7 lakh. This reduction is then deducted from the total income tax and the resulting figure is supplemented by the HEC, to arrive at the final tax payable.
Let us assume that the total income is ₹7,01,000. Under the new regime, if the marginal relief had not been applied, the effective tax rate would have been 3.7%. But since the marginal relief is applicable in this case, the effective tax rate falls to 0.15%.
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The new scheme, even with all these benefits, may not be better than the old scheme for some people. The first among them would be those who invest heavily in investment/insurance schemes for which deductions were available under the old scheme. For such people, the procedure to opt out of the new scheme is as follows. The procedure in case of individuals who do not have any business/professional income is quite simple. Such people would be asked to choose the scheme of their choice, at the time of filing the Income Tax Return (ITR). You can keep switching between the schemes and opt for the one which is beneficial.
However, the procedure in case of individuals having business/professional income is not so simple. Such individuals can opt out of the new regime by filing Form 10-IEA, on the IT portal, on or before the due date of furnishing of RTI. Once the opt-out option is exercised in a financial year, it cannot be reversed in that financial year. Re-entry into the new regime will be permitted only from the financial year in which the individual ceases to earn business/professional income. Hence, the long-term implications should be carefully considered before taking the plunge.
Note: Among others, intraday transactions and transactions in derivative instruments such as futures and options constitute « commercial activities » within the meaning of the Income Tax Act and, therefore, income derived from these activities constitute business income.