India introduced a new income tax regime in the Union Budget 2023. The new income tax regime in India is basically a simplified tax system.The new income tax regime, made the default from FY 2023-24 onwards, continues for FY 2024-25 (AY 2025-26). While it offers lower tax rates, it allows only a limited set of deductions and exemptions, unlike the old regime.
The new tax regime offers lower tax rates but fewer deductions compared to the old regime. This has to be noted that, the new regime has now become the default option for all the taxpayers, meaning taxpayers who do not actively choose either regime will automatically be placed under the new one.
Key Deductions & Allowance Under the New Tax Regime
1. Standard deduction of Rs 50,000 can be claimed
- Flat deduction - Available: Rs 50,000
- Applies to both salaried taxpayers and pensioners.
(Standard deduction of Rs 50,000 or the amount of salary, whichever is lower, is available for both old and new tax regimes from AY 2024-25 onwards.)
2. Long Term Capital Gains (LTCG) on the Sale of Stocks, Shares etc.
Section 112A of the Income Tax Act is a key provision that deals with the taxation of long-term capital gains (LTCG) from the sale of specific assets. It was introduced in 2018 to bring back a tax on these gains, which were previously fully exempt under Section 10(38).
The below data explains the tax rate on long-term capital gains on the sale of:
- Listed equity share
- Equity-oriented fund
- Units of business trust
Tax Rate and Exemption Limit
- For the Financial Year 2024-25 (Assessment Year 2025-26):
- Any LTCG from these assets is exempt up to Rs 1.25 lakh in a financial year.
- Gains exceeding Rs 1.25 lakh are taxed at a flat rate of 12.5%, without the benefit of indexation.
Note: The tax rate of 12.5% and the increased exemption limit of Rs 1.25 lakh are applicable for transfers made on or after July 23, 2024. For transfers before this date, the old rules (10% on gains exceeding Rs 1 lakh) apply.
3. Various exemptions apply to allowances such as transport, conveyance, travel, and employer contributions to employees' NPS accounts, among others
- Contributions your employer makes towards your National Pension System (NPS) account are exempt from tax.
- Deductions under Section 80D for health insurance premiums for yourself, spouse, parents, and dependent children are still allowed.
- If you are differently-abled, any transport allowance received from your employer is exempt from tax.
- Retirement Benefits: Gratuity and leave encashment upon retirement are non-taxable.
4. When using the new tax regime, you generally cannot claim most deductions under Chapter VI-A of the Income Tax Act
The only exceptions are:
- Section 80CCD(2): Deduction for your employer's contribution to your NPS account.
- Section 80CCH: Deduction for contributions made to the Agniveer Corpus Fund.
- Section 80JJAA: Deduction for additional employee costs for eligible businesses.
Effective April 1, 2024, the tax rebate for a resident individual under the new tax regime (Section 115BAC) has been updated as follows:
1. If your total income is up to Rs 7,00,000: You are eligible for a tax rebate that makes your tax liability zero. The rebate will be the lower of your total tax payable or Rs 25,000. This effectively means no tax is paid on income up to Rs 7,00,000.
2. If your total income slightly exceeds Rs 7,00,000: A marginal relief is provided to prevent a sharp increase in tax. Your tax payable will not exceed the amount by which your total income is greater than Rs 7,00,000.
Disclaimer: Every effort has been made to avoid errors or omissions in this material. In spite of this, errors may creep in. Any mistake, error or discrepancy noted may be brought to our notice which shall be taken care of in the next edition. In no event the author shall be liable for any direct, indirect, special or incidental damage resulting from or arising out of or in connection with the use of this information.
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