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Executive Summary: This Article authored by our Founder Shri Mayank Mohanka, FCA, contains an indepth Break-Even Point Analysis, working out the exact amount of Deductions which are needed to be claimed in the Old Regime, at different levels of Incomes, to Break Even with the Reduced Tax liability in the New Regime, in the case of Salaried Class, Professionals & Businessmen, Rental Income Earners, Dividend/Interest Earners. This Article also contains Practical Case Studies on making an Optimum Choice between the Old and the New Personal Tax Regime, both by the Salaried Class as well as by the Professionals.

"Among the total 122 tax laws amendments proposed in the Union Budget 2023, five budget announcements in respect of Personal Taxation have garnered the majority of the attention and traction from all quarters and why not, as these amendments have a direct bearing on all of us- the hard-working Middle Class.

In her Budget Speech also, our hon’ble FM Smt. Nirmala Sitharaman has said,

“Now, I come to what everyone is waiting for -- personal income tax. I have five major announcements to make in this regard. These primarily benefit our hard-working middle class.”

Among these five major personal tax related budget announcements also, the four announcements concentrate on making the new personal tax regime more appealing and attractive to the taxpayers, in comparison to the old personal tax regime.

Our hon’ble CBDT Chairman, in a recent interview has said that the Budget 2023 has sweetened the new personal tax regime. Well, indeed the new regime has been sweetened, w.e.f. FY 2023-23 and onwards, with the reduced tax slab rates, increase in the basic exemption limit from Rs. 2.5. lakhs to Rs. 3 lakhs, increase in the threshold income limit of rebate from the existing Rs. 5 lakhs to Rs. 7 lakhs u/s 87A and the reduction in surcharge rate from 37% to 25% for HNI’s having annual income exceeding Rs. 5 crores. But whether these sweeteners are enough to encourage the taxpayers to switch to the new regime from the old regime, is a million-dollar question.

Friends, in this Article, I am trying to answer this million-dollar question only, but not in some abstract or vague terms, but by way of my in-depth ‘break-even point analysis’ and practical case studies, relevant to professionals, proprietor businessmen, salaried class, rental income earners, dividend and interest income earners.

Break Even Point Analysis

Post Budget 2023 announcements, the salaried class, the businessmen, the professionals, the rental/dividind/interest income earners are confronted with a tough choice between the old regime with available deductions and the new regime with tax slab rates reduction.

They are faced with an intriguing question, i.e., whether the amount of Gross Tax Payable to be filled by them at serial no. 3 of Part B of TTI Schedule, in their respective Income Tax Returns (ITRs) Forms, will get reduced by claiming and filling in the figures of deductions in Schedule VIA of their ITR Forms, or by leaving the said Schedule VIA blank.

The most practical, logical and authentic way to make this choice easier for them, is to work out the exact amount of specified deductions which are required to be claimed by them in the old regime, at different levels of income, to break-even with the reduced tax liability in the new personal tax regime. I have worked out these exact numbers in my in-depth ‘break-even point analysis’, and the same are tabulated below:

Table-1 Break Even Point Analysis for Professionals, Proprietor Businessmen, Rental Income Earners, Dividend/Interest Income Earners    

Table 2 Break Even Point Analysis for Salaried Class & Retired Pensioners

As per my above in-depth ‘break-even point analysis’ in Tables 1 & 2, the tax liability in both the regimes, old and new, remains same, at the break-even point of deductions worked out in column no. 2 of above Tables.

If the amount of deductions, available with the professionals, proprietor businessmen and the salaried class, at their respective income levels, exceed the break-even point of deductions, as per column 2 of the above Tables, then the old regime becomes more beneficial than the new regime in terms of reduced tax liability.

But, if such available deductions are equal to or less than the break-even point of deductions, as per column 2 of the above Tables, or if they don’t want to block their disposable funds in making such investments, then they should definitely switch to the new regime, in order to optimise their respective tax outflows.

Practical Case Studies based on above Break Even Point Analysis

Based on my above Break Even Point Analysis, I have prepared some Practical Case Studies, capturing all the practicalities and nuances involved in the choice between the old and the new personal tax regime, and these are being shared and discussed below:

Practical Case Study for Salaried Individuals

In the undermentioned 3 Case Studies, 3 different scenarios, at 3 different levels of Salary incomes, have been worked out. Scenario 1 computes the tax liability in both the regimes, at the break even point of available deductions. Scenario 2 computes the tax liability in both the regimes, when the amount of available deductions gets reduced from the break-even point of available deductions. Scenario 3 computes the tax liability in both the regimes, when the amount of available deductions gets increased from the break-even point of available deductions.

Case Study 1

Case Study 2

Case Study 3

Practical Case Study for a Regular Professional

In the undermentioned Case Study, 3 different scenarios, at an annual professional income of Rs 14 lakhs, have been worked out. Scenario 1 computes the tax liability in both the regimes, at the break-even point of available deductions. Scenario 2 computes the tax liability in both the regimes, when the amount of available deductions gets reduced from the break-even point of available deductions. Scenario 3 computes the tax liability in both the regimes, when the amount of available deductions gets increased from the break-even point of available deductions.

Choice of Old vs. New Regime in Presumptive Schemes of Income u/s 44AD & 44ADA

The threshold income limit for presumptive taxation scheme in respect of small business u/s 44AD has been increased from Rs 2 crores to Rs 3 crores, and in respect of professionals u/s 44ADA, it has been increased from Rs 50 lakhs to Rs 75 lakhs, w.e.f. FY 2023-24 and onwards.

These increased limits are subject to the mandatory condition that respective cash receipts from such small businesses or professions, must not exceed 5% of their total receipts from such business or profession.

In the presumptive taxation scheme u/s 44AD, the proprietor businessman declares the income at 6%/8% of the total turnover, on presumptive basis, without claiming any business expenditure.

In the presumptive taxation scheme u/s 44ADA, the professional declares the income at 50% of the total turnover, on presumptive basis, without claiming any business expenditure

In terms of tax slab rates, the new personal tax regime u/s 115BAC(1A) is naturally the clear choice for the professionals and the businessmen opting for presumptive income schemes.

However, since Chapter VIA deductions can also be claimed in presumptive income schemes u/s 44AD and 44ADA, therefore, the in-depth break-even point analysis in the above Table 1, will also help them in making an informed, and tax optimal decision.  

Also, it is important to know that w.e.f. FY 2023-24 and onwards, a professional or a proprietor businessman, opting for the old regime with available deductions is required to file an electronic declaration in prescribed form before the due date of filing of return of income, and such person will have just one opportunity to switch back to the new regime, in subsequent years. 

Practical Case Study for a Professional Opting for Presumptive Scheme of Income u/s 44ADA

Conclusion:

Based on the above Five Practical Case Studies in case of Salaried Class as well as the Professionals, it is empirically evident that the tax liability under both the regimes, Old and New, will be equal at the Break Even point of Deductions, at different levels of incomes, worked out in Tables 1 & 2 (supra).

However, if the amount of available deductions becomes lesser than the said break even points of deductions, then the tax liability in old regime becomes greater than the tax liability in the new regime, and as such, new regime becomes more beneficial, in terms of reduced tax outflows.

Conversely, if the amount of available deductions becomes greater than the said break even points of deductions, then the tax liability in old regime becomes lesser than the tax liability in the new regime, and as such, old regime becomes more beneficial, in terms of reduced tax outflows.

Note: This Article has also been published in Taxmann with the Citation [2023] 148 taxmann.com 104 (Article).