Exemptions, Allowances, and Deductions under the Old & New Tax Regime

With the Interim Budget 2024 to be unveiled within a month, several new announcements are expected in the domains of finance and real estate. Whether it is tax rebates for home loans or a decisive boost for affordable housing, every other industry would be somehow affected by the new tax regime.

It is also being debated whether there would be any announcement regarding the new tax regime deductions and exemptions that were deemed default in the Budget 2023. So, before we step into the new interim budget, let us have a look at the exemptions, allowances, and deductions under the old and new tax regimes.

Brief Overview of Tax Regimes

For any government to function properly and to facilitate economic development in a nation, a structured tax regime is an essential source of revenue and has been in existence for centuries. A tax regime in general refers to a set of rules, regulations, and policies that are established by the governing authority. It is used to assess the collection, evaluation, and administration of taxes within a particular area.

A tax regime includes the entire structure that defines how taxes are levied on different individuals, companies, or other organizations. It also includes the framework for the calculation, declaration, and payment of taxes by different bodies.

Tax regimes also include the various types of taxes that are imposed by the government. They include income tax, value-added tax (VAT), corporate tax, goods and service tax (GST), and much more. They also set requirements for taxpayers where they have to declare their income, assets, and transactions for tax purposes.

Importance of Exemptions, Allowances, and Deductions

Exemptions, allowances, and deductions are important for taxpayers as they recognize the diverse conditions of taxpayers and provide benefits so as to create a fair and balanced approach to taxation. These elements play a very important role in the tax regime and offer individuals and entities the opportunity to reduce their taxable income and tax liabilities.

Old Tax Regime

The old tax regime is the tax regime that existed before the introduction of the new tax regime in Budget 2020. It included approximately over 70 exemptions and deductions, including HRA (House Rent Allowance) and LTA (Leave Travel Allowance), that helped reduce taxable income and lower tax payments. Given below are further details on the old tax regime.

1. Overview

The Old Tag Regime is operated on the basis of slab-based systems. It preceded the introduction of the new tax regime in the financial year 2020-21. The income of the taxpayers was divided into different slabs, where each slab corresponds to a tax rate.

2. Applicability

Taxpayers can choose between the old tax regime and the new tax regime at the beginning of every financial year. All individuals, whether salaried or non-salaried can opt for any of these regimes depending on their financial preferences and tax planning strategies.

3. Key Features

The old tax regime offers more options for deductions and exemptions like Section 80C, 80D, etc., which ultimately helps in optimizing the tax liabilities based on their financial situation.

Exemptions under the Old Tax Regime

Exemptions in tax regimes are an integral part of the tax system, offer relief to taxpayers, and promote tax paying behavior and activities. Understanding the exemptions in the old tax regime is extremely important for individuals and entities to manage their tax positions in a legal and responsible manner.

Definition of Exemptions

Exemptions in tax regimes refer to the amount or category of income that is exempted from taxation. These exemptions provide relief to taxpayers and optimize their tax positions legally. They also provide a meticulous tax system that acknowledges some specific income and expenditures as non-taxable.

Types of Exemptions

The Old Regime includes around 70 exemptions and deductions. These include standard deductions, exemptions under Sections 80C and 80D, etc. Section 80C is considered to be one of the most well-known deductions in the old regime, which permits a reduction of taxable income up to INR 1.5 lakhs.

House Rent Allowance (HRA)

HRA, or House Rent Allowance, is an exemption where salaried individuals can claim a portion of their rent as an exemption from taxation. This exemption allows for a deduction of the actual amount of HRA received or 50% of the basic salary, whichever is lower in amount. The amount for exemption in HRA depends on various factors like salary, city of residence, and the amount of rent paid.

4. Leave Travel Allowance (LTA)

LTA, or Leave Travel Allowance, is another exemption that is specifically available for salaried individuals. Through this exemption, these individuals can claim the expenses for domestic travel within India for themselves and their families. LTA allows for a deduction of the LTA amount or 40% of the basic pay, whichever is lower.

5. Other Common Exemptions

Apart from the above-mentioned exemptions, there are other exemptions like tax relief on interest paid on home loans, scholarship income, gratuity, income from agriculture activities, etc.

6. Eligibility Criteria

The type of income, the allowance's intended use, and adherence to specific guidelines are the factors that affect a person's eligibility for exemptions. We can take the example of HRA and ask whether it is mandatory that the taxpayer be a salaried individual who pays rent for housing in order to claim the exemption.

7. Documentation Requirements

Taxpayers must keep up-to-date records so as to receive tax exemptions. Rent receipts, travel records for LTA, and appropriate documentation for further exemptions are a few examples of this. Valid documentation backs up claims made during assessments and guarantees conformity with taxation regulations.

Allowances under the Old Tax Regime

Under the old tax regime, individuals are eligible for a number of concessions that assist in lowering their taxable income. These consist of several benefits such as medical allowance, overtime allowance, conveyance allowance, HRA (house rent allowance), LTA (leave travel allowance), and much more. These allowances provide relief from high taxes while also acknowledging the various financial obligations and situations of taxpayers.

Deductions under the Old Tax Regime

While exemptions are provided as part of a salary, deductions allow the individual to lower the tax amount by investing, saving, or spending on certain items. Tax deductions also promote positive activities like investing in education or philanthropy. Additionally, they foster economic growth and development by enabling enterprises to cover their expenses.

1. Definition of Deductions

The amount of investment or expense that can be subtracted from the total income to reduce the taxable income is known as a deduction. They come in handy in reducing the overall tax liabilities of taxpayers and also encourage good financial behavior.

2. Common Deductions

The common deductions that help taxpayers optimize their tax liabilities are expenses related to education, healthcare, home loans, investments, and insurance premiums.

3. Section 80C – Investments

The most popular and substantial deduction is provided in Section 80C, through which taxable income could be brought down by INR 1.5 lakhs on investments made in various saving schemes.

4. Section 80D – Medical Insurance Premium

Section 80D offers tax deductions for premiums paid on medical insurance up to INR 50,000. This includes the policies covering the individuals, their families, and their parents.

5. Section 24 – Home Loan Interest

Section 24 consists of a deduction on interest on home loans. A taxpayer can claim a reimbursement of INR 2 lakhs if they reside in the house, or the entire interest is waived off if the house is rented.

6. Limitations and Conditions

The conditions and limitations of every deduction are mentioned in the Income Tax Act. Taxpayers must meet specific requirements or adhere to rules in order to be eligible for deductions, which also have maximum limits.

7. Recordkeeping for Deductions

It is essential for taxpayers to save records such as investment receipts, insurance premium statements, house loan interest certificates, and other necessary proofs to prove their claimed deductions during tax assessments.

New Tax Regime

While the old tax regime continues to exist, the finance minister in Budget 2023 mandated the new tax regime as the default one for all taxpayers from FY 2023-24. Significant changes were introduced so as to enable more adoption of the new regime among taxpayers.

1. Overview

Six tax slabs are available under the new tax regime, with 0% tax for income up to INR 3 lakhs and a tax rate that increases by five percentage points for each additional INR 3 lakhs in income. The different income slabs and tax rates hinder the availability of multiple exemptions and deductions.

2. Applicability

All taxpayers, whether salaried or non-salaried, get to use the new tax regime, as it has been set as the default tax regime by the governing body. As mentioned before, taxpayers will also have the option to choose the old tax regimes depending on their financial preferences and viability.

3. Key Features

For taxpayers, the new tax system offers a default option that gives them the ability to deliberately choose to use the old tax regime if they so desire. A tax refund of up to INR 7 lakhs has been made available to individuals whose income was previously limited to INR 5 lakhs under Section 87A.

Exemptions under the New Tax Regime

Adding exemptions to the tax regime makes the whole taxation process a bit complex. That is the reason why there are fewer exemptions in the new tax regime. Fewer exemptions have made the new tax regime simpler than the old tax regime. There are a few exemptions in the new tax regime, which will be discussed below.

1. Changes from the Old Regime

In accordance with the new tax system, the basic tax exemption level, which was Rs. 2.5 lakhs under the old tax regime, is now Rs. 3 lakhs. This helps tackle the issues with taxation liabilities for people with less income.

2. Revised Exemptions

Under the new tax framework, non-government employees are eligible for higher exemption limits when it comes to encashing their leave. The new tax regime exemptions for leave encashment have raised the cap from INR 3 lakhs to INR 25 lakhs.

3. Standard Deduction

The standard deduction of INR 50,000 for salaried individuals is still valid under the new tax regime. This means that, before calculating your taxable income, you just need to deduct INR 50,000 from your gross salary, regardless of your actual income. In the new tax regime, people earning up to INR 7 lakh annually are eligible for a full refund and benefit from the standard deduction, whereas it was INR 5 lakh in the old regime.

4. Conveyance Allowance

Certain allowances, such as the Conveyance Allowance, are free from taxes under the new tax regime. Although the new tax regime takes an entirely new approach and relies less on allowances to provide tax benefits, conveyance allowances are still tax-free up to a specific amount.

5. Other Noteworthy Changes

People who make at least INR 50 lakhs are classified as high-income. High incomes are subject to a surcharge imposed by the Indian government. In comparison to the old tax framework, the new tax regime has a higher percentage rate of surcharge.

6. Impact on Taxpayers

The deduction under the new tax regime is less than the old one, but it has made the filing process simpler. The lower rates and a larger standard deduction in the new tax regime help those with low and moderate incomes. Due to lower brackets, high earners can still save some money even after losing their exemptions.

Must Read: How To File Taxes Under The New Regime In India

Allowances under the New Tax Regime

The new tax regime has been created keeping in mind the taxpayers who cannot avail of most of the exemptions, allowances, and deductions. Therefore, the new tax regime has fewer allowances than the old tax regime, which had many allowances suited for different purposes.

1. Modified Allowances

The New tax regime has removed almost all of the previous allowances found in the old tax regime like Section 80C, 80D, etc. Allowances like conveyance allowance, transport allowance, and a few other allowances are tax-free under the new regime, whereas all other allowances have been removed.

2. Tax Implications

The new tax regime has standardized deductions for all, simplified the filling process, provided a higher tax-free threshold, and lowered the tax rates. But it has also limited the deductions and exemptions in the new tax regime, created a higher surcharge, and limited flexibility.

3. Transitioning from Old to New Allowance System

The new allowance system takes the place of complex deductions with a more simplified methodology. This allowance system is certainly suitable for those with low to moderate incomes. It provides easier filing and is comparatively less burdensome than the old system. But wealthy incomes have to be prepared for greater surcharges and a simple trade-off in exchange for flexibility.

Deductions under the New Tax Regime

Like exemptions, deductions in the new tax regime are also less than the old ones. This was again done to ensure smoothness and ease in the taxation process. New tax regime deductions have been created to cater to the basic needs of taxpayers, keeping in mind that the income tax slabs have already been modified and the percentage taxes have already been reduced.

1. Changes in Deduction Landscape

The new tax regime has lower tax rates for most income slabs but has removed most of the exemptions and deductions. It has removed a few of the most famous deductions, like Section 80D, Section 24, Section 80C, and much more.

2. Strategic Considerations for Deductions

Most taxpayers opting for the new tax regime can make use of the standard deductions in the new tax regime, which prevents them from making use of the complex deductions in the old tax regime. They can also benefit from the tax-free threshold and rebates that are being offered in the new tax regime.

3. Long-term Planning under the New Regime

While making adjustments to your long-term plans for the new tax regime, keep your objectives and flexibility top of mind. Take into account variables such as your age, family circumstances, and professional path. You can additionally stay informed about tax laws and investment opportunities by using internet tools and resources.

Must Read: Comparison of Old and New Tax Regimes: Which Is Better In 2024?

Conclusion

The landscape of exemptions, allowances, and deductions has changed significantly as a result of the transition from the old to the new tax regime. The old tax regime was complex in structure and offered taxpayers numerous opportunities to optimize their tax positions through various exemptions and deductions. Whereas the new tax regime is characterized by lower tax rates, it simplifies the process while narrowing down the scope of deductions.

Choosing the right type of tax regime can not only allow you to leverage your taxation liabilities but will also be beneficial in other financial aspects of your life, including loans. You can choose trusted lenders like SMFG India Credit to apply for personal loans. Check your eligibility, know the documentation requirements, and apply now!