In the recent updates to India’s tax regulations, there’s been a notable change that’s catching the attention of taxpayers: an income up to Rs 7 lakh, potentially not attracting any income tax. This article demystifies how the new tax rules make this possible and what you need to know to avail yourself of this benefit.
New tax slabs and rates
The new tax regime has introduced revised tax slabs and rates. The structure begins with zero tax for income up to Rs 3 lakh and scales up to higher percentages for larger income brackets.
This progressive system ensures that lower-income earners have a reduced tax liability, and for those earning up to Rs 7 lakh, the tax can be zeroed out with the help of rebates and deductions.
Income tax slabs (In Rs)
Tax Rate FY 2022-23 (%)
Tax Rate FY 2023-24 (%)
Between 0 and 2,50,000
0
–
Between 2,50,001 and 3,00,000
5
0
Between 3,00,001 and 5,00,000
5
5
Between 5,00,001 and 6,00,000
10
5
Between 6,00,001 and 7,50,000
10
10
Between 7,50,001 and 9,00,000
15
10
Between 9,00,001 and 10,00,000
15
15
Between 10,00,001 and 12,00,000
20
15
Between 12,00,001 and 12,50,000
20
20
Between 12,50,001 and 15,00,000
25
20
Above 15,00,001
30
30
Impact of the increased exemption limit
For the fiscal year 2023-24, if you choose the new tax regime, you are privy to a considerable advantage: How 7 lakh income is tax-free becomes a practical reality for you. The need to file an income tax return (ITR) becomes optional if your gross taxable income does not exceed the Rs 3 lakh mark.
Additionally, the enhanced basic exemption limit contributes to substantial tax savings. For instance, if your income falls between Rs 2.5 lakh and Rs 3 lakh, you now stand to gain more from the new tax regime compared to the old one, which retains the Rs 2.5 lakh exemption limit.
A significant update in the new tax regime is the uplifted rebate under section 87A. The rebate, previously set at Rs 12,500, has now been increased to Rs 25,000. This is a strategic move that directly benefits those opting for the new tax regime with a taxable income of Rs 7 lakh, as they now become eligible for this enhanced rebate.
For individuals who choose the new tax regime and have a taxable income up to Rs 7 lakh, there’s a substantial financial advantage: they are not required to pay any taxes at the time of filing their Income Tax Returns (ITR). The increase in the rebate under section 87A, which was previously applicable for incomes up to Rs 5 lakh, has now been extended to cover incomes up to Rs 7 lakh. Therefore, in the financial year 2023-24, when you file your ITR for the assessment year 2024-25 and select the new tax regime, if your taxable income does not exceed Rs 7 lakh, you will be exempt from paying taxes.
The new tax regime as the default
With the turn of the financial year on April 1, 2023, the new tax regime transitioned from optional to the default system. This implies that TDS from salary and the computation of income tax liability for returns will be based on this new structure, unless you consciously opt for the old regime.
The new tax framework was initially introduced in the 2020 Budget and was an optional choice until March 2023. Unless a taxpayer specifically chose otherwise, their tax computations were as per the old regime’s slabs and rates.
As we navigate through FY 2023-24, it’s essential to note the compulsory aspect of the new tax regime. You are mandated to specifically opt-out if you wish to adhere to the old system. In case the new regime doesn’t align with your financial strategy – perhaps due to the inability to claim prevalent deductions and exemptions like HRA and those under sections 80C, 80D, and so on – you retain the choice to revert to the old regime.
The roadmap to achieving a tax-free Income of Rs 7 Lakh
To navigate the new tax laws effectively, one must understand the roadmap to achieving a tax-free income of Rs 7 lakh:
1 – Assess your income: Understand your gross income and categorize it appropriately to determine your taxable income.
2 – Opt for the new tax regime: Elect to adopt the new tax regime when filing your returns. This regime offers the Rs 7 lakh exemption threshold.
3 – Maximise deductions: Make prudent investments and expenditures that qualify for deductions under the new regime.
4 – Utilize the rebate: Ensure that your taxable income falls within the Rs 7 lakh bracket to take full advantage of the Section 87A rebate.
5 – Filing your returns: Accurately file your income tax returns, claiming the rebate and deductions to reduce your taxable income to nil.
Conclusion: Navigating towards a tax-free income
The revised tax regime in India presents an opportunity for individuals earning up to Rs 7 lakh to reduce their tax liability significantly. The higher exemption limit, the introduction of the enhanced Section 87A rebate, and the restructured tax slabs all contribute to this possibility.
For those who are still navigating these changes or for anyone seeking to understand how to maximize their tax benefits, Tata Capital’s Moneyfy can provide tailored guidance. By carefully planning and understanding the new tax laws, taxpayers can not only comply with their tax obligations but also improve their financial well-being.
This journey to a tax-free income is not just about understanding the new laws but also about effectively applying them to your financial planning. With the right approach, an income of up to Rs 7 lakh can indeed be free from tax, and you can enjoy the benefits of your hard-earned money to its fullest.
03 June 2024
5 mins read
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