New tax regime: Hidden benefits and operational nuances

The new tax regime became the default option for taxpayers from Budget 2023 for the financial year 2023-24. As is already known, the new regime does away with most deductions and tax benefits that the old regime had. To be sure, the old tax regime is still available to taxpayers.

Here, we highlight the lesser-known aspects about the new tax regime and how it could be beneficial, given the lower surcharges and higher rebates, apart from indicating operational aspects on how to switch out of one option.

Lower surcharge

For the Assessment Year (AY) 2024-25, under the old regime, the applicable rate of surcharge on income tax for individuals with total income (income after all deductions) higher than ₹5 crore is at 37 per cent. This takes the Maximum Marginal Rate of Tax (MMRT) after the Health and Education Cess (HEC) of 4 per cent to 42.74 per cent. However, the surcharge rate on income tax applicable for such individuals under the new regime has been notified as 25 per cent in the Finance Act, 2024. This brings the MMRT under the new regime to 39 per cent.

It is to be noted that the maximum rate of surcharge on that part of total income which consists of dividends, short-term and long-term capital gains from sale of shares, units of equity oriented mutual funds, etc. and long-term capital gains from sale of other capital assets continues to be at a maximum of 15 per cent under both the regimes. Thus, it can be said that MMRT in case of these four income categories is the same under both regimes at 35.88 per cent.

Marginal relief on rebate

Rebate under Section 87A in case of new regime makes zero tax liability a possibility, if total income is up to ₹7 lakh. What if total income marginally exceeds ₹7 lakh? To relieve taxpayers of such a situation, the section offers a marginal relief, unlike in the case of old regime. But there are a couple of conditions to be met to avail of the marginal relief.

First, the total income should be in excess of ₹7 lakh. Second, tax on total income (before adding HEC) should be greater than total income in excess of ₹7 lakh. If both the conditions are met, then the rebate with the effect of marginal relief is calculated as: tax on total income (before HEC) minus total income in excess of ₹7 lakh. This rebate is then deducted from tax on total income and the resultant figure is topped with the HEC, to arrive at the final tax liability.

Let us consider total income to be ₹7,01,000. Under the new regime, had marginal relief not been there, the effective rate of tax would have been 3.7 per cent. But since marginal relief is applicable for this instance, the effective rate of tax drops down to 0.15 per cent.

Opting out

The new regime, even with all such benefits, may not be better than the old regime for certain individuals. Prime among them would be those who are heavily invested in the investment/insurance schemes for which deductions are available under the old regime. For such individuals, the procedure to opt out of the new regime is as follows. The procedure in the case of individuals who don’t have business/profession income is quite simple. Such persons would be prompted to choose a regime of their choice, at the time of filing of the Income Tax Return (ITR). You can keep switching between regimes and opt for the one that is beneficial.

However, the procedure in the case of individuals with business/profession income is not so simple. Such individuals may choose to opt out of the new regime by filing Form 10-IEA, on the IT Portal, on or before the due date of furnishing the ITR. Once the opting out option is exercised in a financial year, it can’t be reversed during that financial year. Re-entering the new regime will not be permitted until the financial year in which the individual ceases to have income from business/profession. Hence, careful consideration of long-term implications is warranted, before taking the plunge.

Note: Among others, Intraday trading and trading in derivative instruments such as futures and options constitutes ‘business’ as per the Income Tax Act and so, the income from such activities constitutes business income.