Last Updated on February 10, 2023 at 9:02 am
Budget 2023 has made the new tax regime the default scheme with an option to continue using the old scheme. The new regime has significant tax cuts with no tax on income of up to Rs 7 lakhs (net taxable).
To appreciate the gravity of these changes, let us consider an example using the New Tax Regime vs Old Tax Regime Calculator.
Consider an individual earning 10L per year.
- The new tax regime (NTR) will result in a tax of Rs. 54 600 from 1st April 2023. Before that, the NTR tax = Rs. 78,000
- Now just to ensure that the tax in the old tax regime (OTR) is equal to Rs. 54,000, Rs. three lakhs is necessary for deductions. For example, Rs. 1.5L under 80C, 0.5L under 80D (for self and parent) and another 0.5L in NPS.
Excluding the health insurance premium, and the mandatory EPF or NPS deductions, that is at least a lakh of money saved in the NTR. That is, you don’t need to invest it in something with a lock-in because you would get that tax deduction anyway in the NTR. In other words, there is no need to chase after VPF, PPF, ELSS etc. The government has given us the freedom to do what we want with more of our money.
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Yes, the OTR still makes sense if there is a considerable HRA or home loan interest. However, this is not the case for many taxpayers; these are not permanent deductions. Home loans would soon, and most people do not stay in rent forever. So sooner than later, NTR will be the way to go. Also, can I opt for the new tax regime now and later switch back to the old one?
The OTR is expected to be sunset organically by making the NTR more attractive. We have always pointed out that obsessing about saving tax can hurt our financial health in the long term. For most of us, the first financial mistake is buying the wrong products because it would save us some tax. The NTR now offers many a way to stop making this mistake.
There cannot be a better opportunity than the present to get rid of this tax-saving mode and focus on creating wealth over the long term without lock-in restrictions. From the next financial year, young earners and HNIs (the surcharge has decreased from 37% to 25%) are expected to shift to the NTR.
This is a great opportunity for young earners to take on capital market risk and build wealth over the long term. We look forward to the day when there is only one tax regime and no tax-saving investments.