The Central Government has been consistently offering various tax benefits to those who opt for the New Income Tax Regime. With each passing year, these incentives have been enhanced, making it a more attractive option for many taxpayers.
Interestingly, even without making any tax-saving investments, the New Income Tax Regime allows individuals to pay lower taxes.
As a result, approximately 70% of taxpayers have already started filing their income tax returns under this new system for the last financial year. But what makes the New Income Tax Regime so appealing? Let’s delve into the three key reasons.
1. Higher Basic Exemption Limit
In the old tax regime, the basic exemption limit was set at ₹2.5 lakhs. However, the New Income Tax Regime raises this limit to ₹3 lakhs. This increase provides immediate relief to taxpayers, allowing them to keep more of their earnings.
2. Enhanced Standard Deduction
The old tax regime offered a standard deduction of ₹50,000, but the New Income Tax Regime takes this a step further. In the Union Budget for the financial year 2024-25, the standard deduction has been increased to ₹75,000.
This hike significantly reduces taxable income, making the new regime even more beneficial for salaried individuals.
3. Additional Tax Rebate
Under the old tax regime, if your annual income was up to ₹5 lakhs, you were eligible for a tax rebate of ₹12,500. In contrast, the New Income Tax Regime offers a rebate of ₹25,000 for those with an annual income of up to ₹7 lakhs.
This effectively means that if your income is within this limit, you won’t have to pay any tax at all under the new regime.
Comparing Tax Rates: Old vs. New
The difference in tax rates between the two regimes is another factor driving people toward the new system. Under the old tax regime, the tax rates were 5% for income between ₹2.5 lakhs and ₹5 lakhs, 20% for income between ₹5 lakhs and ₹10 lakhs, and 30% for income above ₹10 lakhs.
On the other hand, the New Income Tax Regime has a more progressive structure. The tax rates are 5% for income between ₹3 lakhs and ₹7 lakhs, 10% for income between ₹7 lakhs and ₹10 lakhs, 15% for income between ₹10 lakhs and ₹12 lakhs, 20% for income between ₹12 lakhs and ₹15 lakhs, and 30% for income above ₹15 lakhs.
This structure offers significant tax savings, especially for those in higher income brackets.
Old Tax Regime vs. New Tax Regime: Which One Saves You More?
When it comes to choosing between the old and new tax regimes, the decision often hinges on individual circumstances, particularly if you have a home loan.
For instance, under the old tax regime, if you have a home loan, medical insurance, or investments in the National Pension System (NPS), your tax liability can be significantly reduced, or in some cases, you may not have to pay any tax at all.
Consider a scenario where someone with an annual income of ₹10 lakhs has made these investments under the old regime. In such a case, they may end up paying little to no income tax.
However, if the same person, earning ₹10 lakhs annually, does not have any tax-saving investments, they would need to pay ₹42,500 in taxes under the new tax regime (at a rate of 10%). This clearly highlights the importance of strategic investment in reducing tax liability.
For a detailed comparison, refer to Table below, which provides an in-depth breakdown.
Old Tax Regime Vs New Tax Regime
Details | Old Tax Regime | New Tax Regime |
---|---|---|
Annual Income | ₹ 10,00,000 | ₹ 10,00,000 |
Standard Deduction | ₹ 50,000 | ₹ 75,000 |
Housing Loan – Interest on Home Loan | ₹ 2,00,000 | – |
Housing Loan – Principal Repayment | ₹ 1,50,000 | – |
NPS Contribution | ₹ 50,000 | – |
Medical Insurance Premium – Family | ₹ 25,000 | – |
Medical Insurance Premium – Senior Citizens | ₹ 50,000 | – |
Section 80TTA | ₹ 10,000 | – |
Total Taxable Income | ₹ 4,65,000 | ₹ 9,25,000 |
Income Tax | NIL (For income up to ₹ 5 Lakhs) | ₹ 42,500 |
Note:
Under the new tax regime, there is a standard deduction of ₹ 3 Lakhs with incremental tax slabs of 5% from ₹ 3 Lakhs to ₹ 5 Lakhs, 7% from ₹ 5 Lakhs to ₹ 7 Lakhs, and 10% beyond ₹ 7 Lakhs.
Old vs. New Tax Regime: Which One is Best?
Are you confused about whether to choose the old or the new tax regime? It all boils down to your total tax deductions. If your total deductions are less than ₹1.75 lakhs, the new tax regime will likely be more beneficial for you.
On the other hand, if your deductions exceed ₹4 lakhs, the old tax regime is usually the better option.
But what if your deductions fall somewhere between ₹1.75 lakhs and ₹4 lakhs? That’s where it gets tricky. You’ll need to carefully evaluate your financial situation to decide which regime suits you best.
Renting Out Your Home: What’s the Impact?
If you’ve taken a home loan and rented out the property, here’s something important to note: under the new tax regime, you can still claim deductions on the interest paid on the loan during the financial year. However, you must declare the rental income as part of your taxable income.
The Budget 2024-25 Impact: What Should You Do Next?
With the changes brought by the 2024-25 budget, the question remains: when should you opt for the old tax regime, and when does the new regime make more sense? Now that we’ve covered that, let’s dive into the next crucial aspect—how to maximize your investment returns in light of these tax changes.
Navigating these decisions can be complex, but understanding your options will help you make the most of your financial planning.
Navigating Tax Changes: How to Maximize Your Profits
The recent Union Budget has brought changes that have left many investors wondering how to respond.
Specifically, there has been an increase in both short-term and long-term capital gains taxes on stock market-related investments, such as company stocks and equity mutual funds. But does this mean these investments are no longer profitable?
Stock Market Investments: Still the Best Bet?
Despite the hike in capital gains taxes, it’s important to recognize that stock market investments continue to be one of the most profitable options in the long run.
Why? While other investments like fixed deposits, bonds, debt funds, and gold typically offer returns of around 7% to 8% per annum, equity-related investments have historically delivered returns of 12% to 14% over the long term.
The Bigger Picture: Profit vs. Tax
If the increased capital gains tax feels like a hit to your profits, consider this: even with higher taxes, equity investments often outperform other options.
In the long run, the potential returns from the stock market can outweigh the impact of these tax changes, making it clear why stock market investments remain one of the best choices for wealth growth.
Short-Term Capital Gains: What Has Changed?
Until July 23, 2024, if you invested in company stocks or equity mutual funds and sold them within a year, the short-term capital gains tax was a flat 15%, regardless of your income tax bracket. But with the new budget changes, this tax rate has been increased to 20% for sales made after July 23, 2024.
Long-Term Capital Gains: The Current Scenario
For those holding onto their investments for over a year, the rules have also shifted slightly. Previously, long-term capital gains were exempt from tax up to ₹1 lakh in a financial year. Any gains beyond this were taxed at a modest 10%.
However, these changes mean you’ll need to reassess your strategy, especially if your gains exceed the ₹1 lakh exemption.
These adjustments in capital gains tax rates, though they may seem burdensome at first glance, are crucial to understanding how to optimize your investment returns in the current financial landscape.
Increased Thresholds and Higher Taxes: What You Need to Know
Post-budget, there has been a significant update regarding capital gains. The tax-free limit on gains has been raised to ₹1.25 lakhs from the earlier ₹1 lakh. However, the tax rate on gains exceeding this threshold has also been increased to 12.5%.
Depending on your financial situation, this could potentially reduce your net returns.
Capital Gains on Equity: A New Calculation
If your total capital gains from equity investments in a financial year are exactly ₹1.25 lakhs, you’ll be ₹25,000 better off compared to the previous tax rules. Even with the increased tax rate, you may still come out ahead, thanks to the higher tax-free threshold.
Let’s consider an example to clarify. Imagine you earn ₹2 lakhs in long-term capital gains from equity investments in a financial year. Before the 2024-25 budget, the first ₹1 lakh was tax-free, and the remaining ₹1 lakh was taxed at 10%, resulting in a tax bill of ₹10,000.
Under the new rules, the first ₹1.25 lakhs is tax-free. The remaining ₹75,000 is taxed at 12.5%, leading to a tax liability of ₹9,375. This actually results in a lower tax burden compared to the previous system.
What If Your Gains Are Higher?
However, if your gains are around ₹3 lakhs or more, you may find yourself paying slightly more in taxes. To minimize your tax liability, consider realizing long-term capital gains up to ₹1.25 lakhs each financial year. This strategy can help you stay within the tax-free limit and avoid the higher tax rates.
For short-term capital gains, the situation is different. Depending on market conditions, it may be wise to realize these gains when they are high, even if it means paying an additional 5% in taxes. After all, you’re paying this tax out of your profits.
Unlisted Stocks: A New Reality
Another key change is for those holding unlisted company stocks. Previously, if you sold these stocks within two years, the short-term capital gains tax was 15%. This rate has now been increased to 20%. Additionally, the long-term capital gains tax has been raised from 10% to 12.5%.
Given the volatility of equity markets, particularly in the short term, it’s essential to weigh these tax changes carefully. While higher taxes may seem like a drawback, the potential for long-term gains in equity investments often outweighs these costs.
Real Estate Investment: A Tough Pill to Swallow?
For those invested in real estate, the recent budget has delivered quite a shock. The removal of the inflation indexation benefit, which allowed investors to adjust their capital gains for inflation, has been a significant blow.
Previously, long-term capital gains on real estate were taxed at 20% after factoring in inflation, but now, these gains will be taxed at a flat 12.5%, without any adjustment for inflation.
Impact on Real Estate Properties
This new tax policy applies to real estate properties purchased after April 1, 2001, as per the budget announcement. This change has particularly hit those who have invested in property as a means to fund major life expenses such as children’s higher education, weddings, or retirement.
Consider this example: Suppose someone purchased a real estate property for ₹25 lakhs in the 2002-03 financial year. If they sold it before the budget for ₹1 crore, they would have had to pay only ₹1.85 lakhs in capital gains tax.
However, under the new budget rules, selling the same property for ₹1 crore would result in a tax liability of ₹9.38 lakhs—a staggering increase of ₹7.53 lakhs.
This significant rise in tax burden has left many real estate investors reeling, forcing them to rethink their financial strategies .
Real Estate: What Happens if No Sale is Made?
Details | If Sale is Made | If No Sale is Made |
---|---|---|
Purchase Price (2002-03) | ₹ 25 Lakhs | ₹ 25 Lakhs |
Selling Price (2024-25) | ₹ 1 Crore | ₹ 1 Crore |
Capital Gain Tax Based on Purchase Price | ₹ 25 Lakhs X (363/100) = ₹ 90.75 Lakhs | – |
Indexation Benefit Amount | ₹ 1 Crore – ₹ 90.75 Lakhs = ₹ 9.25 Lakhs | ₹ 1 Crore – ₹ 25 Lakhs = ₹ 75 Lakhs |
Applicable Capital Gains Tax | 20% | 12.5% |
Final Tax Amount | ₹ 1.85 Lakhs | ₹ 9.38 Lakhs |
Impact of New Taxation on Real Estate: What You Need to Know
The recent changes in tax policies by the central government have sent ripples through the real estate sector and among individuals alike. Many stakeholders have urged the government to reconsider these tax implications, as they could potentially have significant financial impacts.
In response to these concerns, the government issued an announcement on August 6th, offering some relief and new options for real estate transactions.
New Options for Real Estate Investors
For properties purchased before July 23, 2024, the government has provided two taxation options:
- A flat tax rate of 12.5% without inflation adjustment.
- A 20% tax rate after accounting for inflation adjustments.
This move has provided much-needed relief to those who have already invested in real estate, as it offers flexibility and potentially lower tax liabilities.
Tax Implications for Future Buyers
However, for those purchasing real estate after July 23, the story changes. These buyers will face higher taxes when selling their properties in the future.
Short-term capital gains tax for real estate transactions remains tied to the individual’s income tax bracket, continuing the trend of significant tax burdens for short-term investors.
When it comes to the total cost of acquiring real estate, buyers should also consider the additional expenses. These include brokerage fees (around 2%), registration costs (approximately 9%), and other miscellaneous costs (about 1%).
Together, these add up to more than 12% of the property’s value, meaning the property must appreciate significantly for the investment to be truly profitable.
Digital Real Estate: A Profitable Alternative?
Given these tax implications and additional costs, those purchasing physical real estate purely for status, enjoyment, or personal use might still find value.
However, for investors looking for profitability, digital real estate options like REITs (Real Estate Investment Trusts) and In VITs (Infrastructure Investment Trusts) are becoming increasingly attractive.
Investing in digital real estate comes with much lower costs, typically between 0.25% and 0.5%. Moreover, these investments can offer returns of 8% to 12% annually.
Recent changes have also made these options more appealing: the period for calculating short-term capital gains in REITs and In VITs has been reduced from 36 months to 12 months, although the tax rate for these gains has increased from 15% to 20%.
Similarly, long-term capital gains tax has risen from 10% to 12.5%, but the reduced holding period and lower investment costs make these digital real estate options more profitable than traditional physical properties.
How to Maximize Returns on Gold Investments
In the latest budget, the holding period for long-term capital gains (LTCG) on physical gold has been reduced from 36 months to 24 months. Previously, investors benefited from an inflation adjustment, which allowed them to pay 20% tax on adjusted gains.
Now, the tax rate has been reduced to 12.5%, but the inflation adjustment has been removed. The short-term capital gains (STCG) tax, however, remains based on the investor’s income tax slab.
Physical Gold: Is It Still Profitable?
For those investing in gold, purchasing physical gold—such as jewelry—might no longer be the most profitable option.
The reason is simple: when you buy gold jewelry, you immediately lose 12%-15% in making charges, wastage, and GST. Additionally, when you sell the jewelry, you might lose another 3% due to it being considered “old gold.” Given these factors, investing in physical gold may not yield the best returns.
Gold ETFs: A Smarter Choice?
To make the most of your gold investment, consider investing in Gold ETFs. The cost of investment here is significantly lower, ranging from 0.25% to 0.5%. Moreover, the holding period for LTCG on Gold ETFs is just 12 months.
If you sell your units within 12 months, you’ll pay a 20% tax on STCG. However, if you hold on for over a year, the tax on LTCG is just 12.5%.
Compared to physical gold, Gold ETFs offer a more profitable investment option due to lower holding periods, reduced costs, and minimized charges such as wastage, making charges, and GST.
Making the Most of Your Investments
Following the changes introduced in the Union Budget, it’s crucial to reassess how you invest in key assets such as corporate stocks, equity-linked mutual funds, real estate, and gold.
By understanding these new tax regulations and making informed decisions, you can position yourself to maximize your returns. Remember, with the right strategy, your investments can still be highly profitable!
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