The new tax regime reduces tax rates at the cost of tax-free investments. Is it good or bad?

The Union Budget 2023 introduced progressive changes to the new tax regime, but it does not incentivise savings through tax-saving investments.

new tax regime reduces tax rates at the cost of tax-free investments

The Union Budget 2023 made consumer-friendly changes to the new tax regime, making it more popular and appealing. These changes include the following:

  • The threshold limit for claiming tax rebates has increased from Rs. 5 lakhs to Rs. 7 lakhs.
  • The number of tax slabs has been reduced. Earlier, there were six slabs, and now there are five.
  • The minimum threshold limit for tax has increased to Rs. 3 lakhs. This limit was Rs. 2.5 lakhs earlier.
  • The highest surcharge rate has been reduced to 25%. Previously, the rate was quite high at 37%.
  • Standard deduction from taxable salary income is allowed in the new tax regime. Earlier, it was disallowed.

The new tax regime would be made default on the income tax website, but the taxpayer can choose the old tax regime for filing taxes.

Also Read - Here are the key highlights of the Union Budget 2023

While the new tax regime allows better tax savings, there are no tax benefits on investments. By increasing the rebate limit to Rs. 7 lakhs, the new regime offers the same tax benefit as the old tax regime. But there's a difference. Under the new tax regime, taxpayers can benefit from reduced taxes without making tax-saving investments, as the rebate limit has been increased for tax savings.

On the other hand, in the old tax regime, the rebate limit is Rs. 5 lakhs. If your income is more than Rs. 5 lakhs, you can use tax-free investments to reduce it and bring it within the rebate limit. Here are the deductions available:

  • Up to Rs. 1.5 lakhs under Section 80C
  • Additional up to Rs. 50,000 under Section 80CCD (1B)
  • Other deductions under Section 80TTA, 80TTB, 80D, 80U, etc.

The old tax regime promotes tax-saving investments to help reduce your tax liability. The new tax regime disallowed tax benefits on investments and was unpopular. However, with the changes brought in by the Union Budget 2023, the new regime does not require tax-saving investments to help you save on tax. With the rebate limit now at Rs. 7 lakhs and lower tax rates, taxpayers can save without investing in tax-saving instruments.

The flip side of the new tax regime

With the absence of tax-saving sections like 80C, 80D, etc., the new regime discourages household savings. It does not give taxpayers the incentive to save. And even if you save, you cannot claim a deduction for your savings under the new regime.

In India, the domestic savings rate saw a low of 29.3% at the end of 2021. Although it is higher than the world average of 26.9%, it needs improvement. The old tax regime nudges households to save and reduce their tax liability - the new regime doesn't.

Also Read - Here are some incomes that are exempted under the new tax regime

So, what should be done?

As a taxpayer, you can choose between the old and new tax regimes when filing your returns. To determine which regime is best for you, compare your tax liability under both.

If you decide to go with the new tax regime, it's important to stay motivated to save for your financial goals and independence. While the new regime may discourage savings through tax-saving investments, there are still plenty of suitable avenues available to create a corpus. Ultimately, with the right mindset, you can still save and invest under either of the regimes.

Related - Here's a comparison between the new and the old tax regimes to know which is better after the latest changes

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