Budget 2024: With greater incentives rolled out, would it be beneficial for taxpayers to embrace new tax regime?

On July 23, 2024, Finance Minister Nirmala Sitharaman presented the Union Budget 2024-25 in the Parliament, announcing modifications to direct taxes. One notable highlight of the Union Budget 2024-25 is the 50% rise in the standard deduction, now up to ₹75,000.

This is a beneficial move for salaried taxpayers, particularly those choosing the new tax regime, as it lowers their taxable income and increases disposable income. This stands in stark contrast to the previous standard deduction, which was capped at just ₹50,000.

Crucially, the budget unveiled revisions to the tax brackets under the new income tax system, to enhance disposable income for salaried individuals. This initiative is expected to foster increased spending and stimulate economic growth. Here’s a summary of the updated tax brackets for FY 2024-25 (AY 2025-26):

• Income up to ₹3 lakhs: Exempt from tax (no change)
• ₹3 lakhs to ₹7 lakhs: 5% tax rate (increased threshold from ₹5 lakh)
• ₹7 lakhs to ₹10 lakhs: 10% tax rate
• ₹10 lakhs to ₹12 lakhs: 15% tax rate
• ₹12 lakhs to ₹15 lakhs: 20% tax rate
• Above ₹15 lakhs: 30% tax rate

These adjustments will result in many individuals moving into a lower tax bracket, allowing them to retain more of their earnings. This extra income can be allocated towards spending, saving, or investments, all of which bolster the economy.

Salaried taxpayers benefit from the increased standard deduction, especially those who opt for the new tax structure. Moreover, there is a proposal to increase the family pension deduction for pensioners from ₹15,000 to ₹25,000. It raises their disposable income by reducing their taxable income.

Would it be beneficial to switch to the new tax regime to increase savings?

Whether switching to the new tax regime to increase savings is advantageous depends on your specific situation. The advantages of embracing the new tax regime include:

• Increased standard deduction: The new regime provides a substantially higher standard deduction (Rs. 75,000), whereas the old regime remains unchanged at Rs. 50,000. This effectively lowers your taxable income.
• Updated tax brackets: The recent budget raised the threshold for the 5% tax bracket to ₹7 lakhs. This change has the potential to reduce your tax obligation if you belong to this bracket.
• Streamlined tax filing: The new regime simplifies the tax filing process by eliminating the requirement to claim various deductions and exemptions.

Selecting the new tax system does, however, come with some disadvantages. If you choose to go with it, you forfeit many deductions that were available under the previous system, including the House Rent Allowance (HRA), travel expenses, Section 80D medical insurance premiums, and others. 

Your taxable income may be significantly reduced by these deductions, particularly if you have large out-of-pocket expenses in these areas. Additionally, individuals in higher tax brackets may find that the benefit of the increased standard deduction has a lesser impact.