OLD TAX VS. NEW TAX REGIME (Syllabus: GS Paper 3 – Economy)

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Context: The default adoption of the new tax regime is a notable modification outlined in the Budget 2023.

Old tax Regime

About: It is "deduction-based regime," offered a wide array of deductions and exemptions, offering potential benefits for taxpayers adept at leveraging them effectively.
Extensive deductions and exemptions: With more than 70 options, including Section 80C offering a substantial limit of ₹1.5 lakh, these provisions have the potential to substantially decrease your taxable income and reduce your overall tax liability.
Established system: It served as the primary tax regime for numerous years preceding the introduction of the new tax regime in 2020.
Taxpayer discretion: Individuals retain the option to choose the old tax regime, even though the new regime is set as the default choice.

New Tax Regime

About: The implementation of the new tax regime in India in 2020 marks a substantial shift, aiming to streamline processes through lower tax rates. However, this comes with the trade-off of reduced deductions and exemptions.
Key Changes in FY 2023-24: Delving into the fiscal year 2023-24 (assessment year 2024-25), noteworthy adjustments have been introduced in the tax structure, reflecting the ongoing evolution of the system.
Elevated basic exemption limit and rebate: The basic exemption limit, which represents the income threshold below which no tax is due, has been raised from ₹2.5 lakhs to ₹3 lakhs in the new tax regime.

oAdditionally, the tax rebate under section 87A has been raised from ₹5 lakhs to ₹7 lakhs. Consequently, income up to ₹7 lakhs is now effectively tax-free in the new regime.

Restoration of basic deduction: The standard deduction of ₹50,000, previously applicable exclusively to the old tax regime, has now been incorporated into the new tax regime. This serves to further decrease the taxable income under the new regime.
Reduced surcharge: The surcharge rate on income surpassing ₹5 crores has been decreased from 37% to 25% in the new tax regime. This results in a reduced effective tax rate for individuals with high incomes who choose the new regime.

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