Income Tax slabs for FY 2024-25: Tax deductions and rebates explained

Finance Minister Nirmala Sitharaman has not proposed any changes in the income tax slab rates in the interim Budget 2024. However, the notable modification in the income tax slabs includes a reduction of tax slabs from 6 to 5 alongside an increase in the basic exemption limit from Rs.2.5 lakh to Rs.3 lakh from April 1, 2023.

The major changes in tax rules for individuals applicable for the financial year 2024-25 are hereunder.

1. Tax rebate up to Rs.7 lakh under section 87A allowed under the new tax regime: The rebate under Section 87A increased to taxable income of Rs 7 lakh (tax rebate of 25,000) from 5 lakh (tax rebate of Rs 12,500). This effectively means that any individual opting for the new tax regime with a taxable income of up to Rs 7 lakh (after standard deduction) will not pay any taxes. Earlier, this tax rebate was available till taxable income of Rs 5 lakh. The individuals opting for the Old tax regime with a taxable income of up to Rs 5 lakh will not pay any taxes.
2. The basic exemption limit was hiked to Rs 3 lakh from Rs 2.5 lakh in the new tax regime
3. The standard deduction is available for both old and new regimes.
4. A standard deduction of Rs 50,000 was introduced under the new tax regime for salaried and pensioners
5. Family pensioners can also claim the standard deduction of Rs 15,000 under the new tax regime

The new income tax regime is the default regime.No change in tax slabs under the old regime. The new tax regime offers six tax slabs, with zero tax for income up to ₹3 lakh. New tax slabs are as follows.

The current health and education cess rate for FY 2024-2025 (AY 2025-2026) is 4% over the tax payable. It is applicable on income tax at all slabs.

The following income tax deductions are still available both in the old tax regime and the new tax regime:

1. Standard deduction of Rs.50000 (Rupees Fifty thousand) to salaried individuals and deduction from family pension up to Rs.15000 (Rupees Fifteen thousand), allowed.
2. Death-cum-retirement benefit,
3. Commutated value of pensions,
4. The amount received on VRS up to Rs 5 lakh,
5. Employee Provident Fund money,
6. Money received as scholarship for education,
7. Cash received as awards constituted in the public interest,
8. Short-term withdrawals and maturity amounts from the National Pension Scheme,
9. The leave encashment is up to 10 months average salary for non-government employees is exempt up to Rs.25 lakhs. This limit was 3 lakhs since 2002.

Advantages of the old tax regime:

Under the old tax regime, individuals with an income up to Rs.5 Lakh will not have to pay any tax.  Deductions of Rs.50000 to salaried individuals, and deductions from family pensions up to Rs.15000, are allowed as Standard deductions. Besides, there are many other deductions and rebates available on income under the old tax regime such as Leave Travel Allowance (LTA), House Rent Allowance (HRA) [If you do not know how to claim benefit on HRA received (Click HRA), Conveyance, Daily expenses in the course of employment, Relocation allowance, Helper allowance, Children education allowance, Other special allowances [Section 10(14)], Professional tax, Interest on housing loan (Section 24), Chapter VI-A deduction (80C, 80D, 80E, 80EEA, 80EEB, 80 TTA, 80TTB, etc.).  The maximum deductions that you can claim under sections 80C to 80U are listed in the following post. To know click ‘Eligible Rebate and Deductions’.

The new income tax rates are lower compared to the old tax rate. However, anyone opting for the new tax regime will have to forego most of the deductions and reliefs available under the old tax regime such as Leave Travel Allowance (LTA), House Rent Allowance (HRA), Conveyance, Daily expenses in the course of employment, Relocation allowance, Helper allowance, Children education allowance, Other special allowances [Section 10(14)], Professional tax, Interest on housing loan (Section 24), Chapter VI-A deduction (80C,80D, 80E,80EEA,80EEB,80 TTA, 80TTB, etc.). 

Before listing out the new slabs in the budget 2023, the finance minister announced that the Old Tax Regime will only be available on request now, and what was known as the New Tax Regime so far will thus be considered the default regime. Taxpayers can choose between old and new tax regimes while filing income tax returns.

Tax on Leave encashment increased:

The limit of Rs.3 lakh for tax exemption on leave encashment on separation from employer of non-government salaried employees has been increased to Rs.25 lakh in Budget 2023. The separation from the employer means resignation, retirement, or any other event where a person leaves his/her job. This limit was Rs.3 lakh since 2002 and has now increased to Rs.25 lakh owing to the general increase in income from salary.

• No LTCG tax benefit on Debt Mutual Funds:

From April 1, investments in debt mutual funds will be taxed as short-term capital gains. The move would strip investors of the long-term tax benefits that had made such investments popular.

•  End of tax arbitrage for Market Linked Debentures (MLDs):

Budget 2023 seeks to insert a new section 50AA in the Act to provide that irrespective of the holding period, gains from Market Linked Debentures (MLDs) shall be taxable as short-term capital gains (STCG) at applicable rates. Hence, investment in Market Linked Debentures (MLDs) post-April 1 will be short-term capital assets. With this, grandfathering of earlier investments will end and the impact on the mutual fund industry will be slightly negative. Market-linked Linked Debentures (MLD) are a type of non-convertible debt instrument wherein the returns are determined by the performance of their underlying indexes like Government yield, equity indexes, etc. There is no regular coupon pay-off and the returns are paid at the time of maturity.

• Tax exemption limit on Life Insurance policies:

For life insurance policies issued on or after 1 April 2023, the tax exemption on maturity benefits under Section 10(10D) will only be applicable if the aggregate annual premium paid by an individual is up to ₹. 5 lakhs. The above rule won’t apply to ULIP (Unit Linked Insurance Plan).

• Enhancement of deposit limit under SCSS and Monthly income schemes:

The maximum deposit limit for the senior citizen savings schemes will be increased to ₹30 lakhs from ₹15 lakhs. The maximum deposit limit for the Post Office monthly income scheme will be increased to ₹9 lakhs from 4.5 lakhs for single accounts and ₹15 lakhs from ₹7.5 lakhs for joint accounts.

1. Physical gold conversion to e-gold receipt not to attract capital gains tax:

To encourage the buying of electronic gold, the government announced that there would be no capital gains tax if physical gold is converted to an Electronic Gold Receipt (EGR) and vice versa. This will be effective from 1 April 2023.

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[Nearly, 104 amendments are made either by amending/omitting existing sections or by insertion of new sections. In this article, the amendments, which are most relevant to salaried persons, are covered below.]