The Indian income tax system is structured to allow various provisions that help taxpayers reduce their taxable income, thereby lowering their overall tax liability. Among these provisions, exemptions and deductions play a pivotal role. While often used interchangeably in common parlance, they represent distinct mechanisms within the Income Tax Act, 1961, designed to provide relief. Exemptions refer to specific incomes that are not included in the computation of total income, either fully or partially, meaning they are not taxed at all. Deductions, on the other hand, are amounts that can be subtracted from the gross total income to arrive at the net taxable income, provided certain conditions and investments are met.

The financial year 2023-24 (corresponding to the assessment year 2024-25) introduced significant changes to the tax landscape, primarily through the amendments made by the Union Budget 2023. These changes heavily impacted how exemptions and deductions are applied, particularly concerning the two prevailing tax regimes: the old tax regime and the new tax regime. Understanding these distinctions and their implications is crucial for effective tax planning and compliance for individuals and Hindu Undivided Families (HUFs) during this period.

Understanding the Financial Year 2023-24 and Tax Regimes

The financial year 2023-24 spans from April 1, 2023, to March 31, 2024. Income earned during this period will be assessed and taxed in the subsequent assessment year, which is 2024-25. A key feature of the Indian tax system since Financial Year 2020-21 (Assessment Year 2021-22) has been the existence of two distinct tax regimes for individuals and HUFs. For the financial year 2023-24, the government made the “new tax regime” the default option, meaning taxpayers are automatically placed under it unless they explicitly choose to opt for the “old tax regime.”

The old tax regime allows taxpayers to claim a wide array of exemptions and deductions under various sections of the Income Tax Act. This regime has higher tax rates compared to the new regime but offers substantial avenues for reducing taxable income through investments, expenses, and specific allowances. Historically, this has been the traditional approach to taxation in India.

The new tax regime, introduced to simplify the tax structure and encourage a shift away from investment-linked tax planning, offers lower tax rates across different income slabs. However, the trade-off is that it provides significantly fewer exemptions and deductions. The Union Budget 2023 enhanced the attractiveness of the new tax regime for FY 2023-24 by increasing the basic exemption limit, revising tax slabs, and notably, introducing the standard deduction for salaried individuals and pensioners, which was previously exclusive to the old regime. This move aimed to make the new regime more appealing to a broader segment of taxpayers.

Exemptions for Financial Year 2023-24

Exemptions refer to certain types of income that are either fully or partially excluded from the total income calculation, meaning they are not subjected to tax. While the old tax regime allows for a broad spectrum of exemptions, the new tax regime is very restrictive, eliminating most of them.

Common Exemptions under the Old Tax Regime (and limited applicability in New Regime):

  1. House Rent Allowance (HRA) u/s 10(13A): This exemption is available to salaried individuals who receive HRA from their employer and live in rented accommodation. The least of the following three amounts is exempt from tax:

    • Actual HRA received.
    • 50% of salary (Basic + Dearness Allowance + Commission based on fixed percentage of turnover) if residing in Mumbai, Kolkata, Delhi, or Chennai; or 40% of salary for other cities.
    • Actual rent paid less 10% of salary.
    • Note: This exemption is not available under the new tax regime.

  2. Leave Travel Concession (LTC) u/s 10(5): This exemption allows salaried individuals to claim an exemption for travel expenses incurred on leave for themselves and their family members within India. The exemption is limited to the actual travel cost (air, rail, or road fare) and can be claimed twice in a block of four calendar years.

    • Note: This exemption is not available under the new tax regime.

  3. Gratuity u/s 10(10): Gratuity received by an employee is exempt up to certain limits:

    • Government Employees: Fully exempt.
    • Non-Government Employees (covered by Payment of Gratuity Act, 1972): The least of: actual gratuity received, Rs. 20 lakh (increased from Rs. 10 lakh w.e.f. March 29, 2018), or 15 days’ salary for each completed year of service.
    • Non-Government Employees (not covered by Payment of Gratuity Act): The least of: actual gratuity received, Rs. 20 lakh, or half month’s average salary for each completed year of service.

  4. Commutation of Pension u/s 10(10A):

    • Government Employees: Fully exempt.
    • Non-Government Employees:
      • If the employee receives gratuity: 1/3rd of the commuted value of the pension.
      • If the employee does not receive gratuity: 1/2 of the commuted value of the pension.

  5. Voluntary Retirement Scheme (VRS) Compensation u/s 10(10C): Compensation received on voluntary retirement or termination of service is exempt up to a limit of Rs. 5 lakh, subject to specific conditions.

  6. Maturity amount of Life Insurance Policy u/s 10(10D): The sum received under a life insurance policy, including bonus, is generally exempt from tax. However, there are conditions:

    • For policies issued on or after April 1, 2012, the premium payable for any year should not exceed 10% of the actual capital sum assured. If it exceeds this limit, the maturity amount becomes taxable.
    • Crucial Change for FY 2023-24: For life insurance policies (other than Unit Linked Insurance Plans - ULIPs) issued on or after April 1, 2023, if the aggregate premium payable in any financial year exceeds Rs. 5 lakh, the maturity amount will be taxable. This is a significant change aimed at taxing high-value insurance policies. ULIPs continue to be governed by the existing rules.

  7. Agricultural Income u/s 10(1): Income derived from agricultural activities in India is fully exempt from income tax. This includes rent or revenue from agricultural land, income from agricultural operations, and income from processing agricultural produce.

  8. Interest Income from specific investments:

    • Interest on Public Provident Fund (PPF).
    • Interest on Sukanya Samriddhi Yojana (SSY).
    • Interest on tax-free bonds.
    • Note: These remain exempt in both old and new tax regimes.

  9. Scholarships u/s 10(16): Scholarships granted to meet the cost of education are fully exempt from tax.

  10. Specific Allowances u/s 10(14): Certain allowances received by employees are exempt up to prescribed limits or fully, provided they are incurred for official purposes. Examples include:

    • Children Education Allowance: Rs. 100 per month per child, up to a maximum of two children.
    • Hostel Expenditure Allowance: Rs. 300 per month per child, up to a maximum of two children.
    • Transport Allowance: For physically challenged employees, Rs. 3,200 per month.
    • Conveyance Allowance: Exempt to the extent it is incurred for official duties.
    • Travel Allowance: Exempt to the extent it is incurred for official duties.
    • Note: Most of these specific allowances are not available under the new tax regime, except for specific allowances given to government employees abroad or certain compensatory allowances.

  11. Foreign Service Allowance u/s 10(7): For Indian citizens who are government employees serving outside India, any allowance or perquisite paid by the government for their services abroad is fully exempt. This is one of the very few exemptions that remains available under the new tax regime.

Standard Deductions for Financial Year 2023-24

A standard deduction is a fixed amount that taxpayers can subtract from their gross salary income to arrive at their taxable salary. It is a simpler alternative to claiming individual deductions for specific expenses like transport allowance or medical reimbursement.

Standard Deduction for Salaried Individuals and Pensioners:

For the Financial Year 2023-24, a standard deduction of Rs. 50,000 is available to salaried individuals and pensioners. This is a significant development because, unlike previous financial years, this standard deduction is now available under both the old tax regime and the new tax regime.

Historically, the standard deduction was re-introduced for salaried individuals from FY 2018-19, replacing the previous exemptions for transport allowance and medical reimbursement. Until FY 2022-23, it was only available in the old tax regime. The Budget 2023 extended this benefit to the new tax regime as well, making the new regime more attractive for salaried and pension-earning individuals by providing a direct reduction in their taxable income without requiring specific expense proofs.

Standard Deduction for Family Pensioners:

Individuals receiving family pension (pension received by family members after the death of an employee) can claim a deduction of Rs. 15,000 or 1/3rd of the pension received, whichever is less, from the family pension income. This deduction is separate from the Rs. 50,000 standard deduction for salaried/pensioners and is applicable to family pension income. This deduction is available in both regimes.

Other Key Deductions for Financial Year 2023-24

Deductions allow taxpayers to reduce their gross total income by investing in specific instruments or incurring certain eligible expenses. Most of these deductions are available only under the old tax regime.

Deductions Available Primarily Under the Old Tax Regime:

  1. Section 80C, 80CCC, and 80CCD(1) - Combined Limit of Rs. 1.5 Lakhs: This is the most popular section for tax savings, allowing a deduction for various investments and expenses.

    • Eligible investments/expenses include:
      • Employee Provident Fund (EPF) contributions.
      • Public Provident Fund (PPF) contributions.
      • Equity Linked Savings Schemes (ELSS) of mutual funds.
      • Life insurance premiums.
      • Principal repayment of home loan.
      • Children’s tuition fees (for up to two children).
      • National Savings Certificate (NSC).
      • Sukanya Samriddhi Yojana (SSY) deposits.
      • Senior Citizen Savings Scheme (SCSS).
      • 5-year tax-saving fixed deposits.
      • Unit Linked Insurance Plans (ULIPs).
      • Pension plans like those from LIC or other insurers (u/s 80CCC).
      • Employee’s contribution to National Pension System (NPS) u/s 80CCD(1).
    • Note: These deductions are not available under the new tax regime.

  2. Section 80CCD(1B) - Additional Deduction for NPS: An additional deduction of up to Rs. 50,000 is available for voluntary contributions made by an individual to the National Pension System (NPS) account, over and above the Rs. 1.5 lakh limit under Section 80C.

    • Note: This deduction is not available under the new tax regime.

  3. Section 80CCD(2) - Employer’s Contribution to NPS: This allows a deduction for the employer’s contribution to an employee’s NPS account, up to 10% of the employee’s basic salary plus dearness allowance. For central government employees, the limit is 14%.

    • Crucial Note: This is one of the very few deductions that is available under both the old tax regime and the new tax regime.

  4. Section 80D - Medical Insurance Premium: Deduction for health insurance premiums paid for self, spouse, dependent children, and parents.

    • Up to Rs. 25,000 for self, spouse, and dependent children (up to Rs. 50,000 if any member is a senior citizen).
    • An additional deduction of up to Rs. 25,000 for premiums paid for parents (up to Rs. 50,000 if parents are senior citizens).
    • A deduction of up to Rs. 5,000 for preventive health check-ups (within the overall limits).
    • Note: This deduction is not available under the new tax regime.

  5. Section 80E - Interest on Education Loan: Deduction for interest paid on an education loan taken for higher education of self, spouse, or children. There is no upper limit on the amount of interest that can be claimed, but it is available for up to 8 years or until the interest is fully repaid, whichever is earlier.

    • Note: This deduction is not available under the new tax regime.

  6. Section 80EE / 80EEA - Interest on Home Loan for Affordable Housing:

    • Section 80EE: Allows an additional deduction of up to Rs. 50,000 for interest on a home loan, subject to conditions like the value of the property not exceeding Rs. 50 lakh and the loan being sanctioned between April 1, 2016, and March 31, 2017.
    • Section 80EEA: Allows an additional deduction of up to Rs. 1.5 lakh for interest on a home loan, provided the loan was sanctioned between April 1, 2019, and March 31, 2022, and the stamp duty value of the residential house property does not exceed Rs. 45 lakh. This deduction is available over and above the deduction under Section 24(b).
    • Note: These deductions are not available under the new tax regime.

  7. Section 80G - Donations to Charitable Institutions: Deductions for donations made to certain approved charitable institutions and funds. The deduction amount varies (100% or 50% of the donated amount) and may be subject to a qualifying limit.

    • Note: This deduction is not available under the new tax regime.

  8. Section 80TTA / 80TTB - Interest on Savings Account / Deposits:

    • Section 80TTA: Deduction of up to Rs. 10,000 on interest earned from savings bank accounts for individuals and HUFs (excluding senior citizens).
    • Section 80TTB: For senior citizens, a deduction of up to Rs. 50,000 is allowed on interest earned from savings accounts, fixed deposits, and recurring deposits. This section replaces 80TTA for senior citizens.
    • Note: These deductions are not available under the new tax regime.

  9. Section 80U - Deduction for Person with Disability: An individual with a disability can claim a deduction of Rs. 75,000. If the disability is severe, the deduction increases to Rs. 1.25 lakh.

    • Note: This deduction is not available under the new tax regime.

  10. Section 80DD - Medical Treatment of Disabled Dependent: A deduction for expenses incurred on medical treatment, training, or maintenance of a disabled dependent. The deduction is Rs. 75,000 for disability and Rs. 1.25 lakh for severe disability.

    • Note: This deduction is not available under the new tax regime.

  11. Section 80DDB - Medical Treatment for Specific Diseases: Deduction for expenses incurred on medical treatment for specified diseases or ailments for self or a dependent. The deduction limit is Rs. 40,000 (Rs. 1 lakh for senior citizens).

    • Note: This deduction is not available under the new tax regime.

Key Changes and Considerations for FY 2023-24

The Union Budget 2023 introduced several significant changes that profoundly impact the choice between the old and new tax regimes for FY 2023-24 (AY 2024-25):

  1. New Tax Regime as Default: From FY 2023-24, the new tax regime became the default option for individuals and HUFs. Taxpayers now have to explicitly opt out of the new regime to avail the benefits of the old regime. This means if no choice is made, the new regime’s rules will apply.
  2. Standard Deduction in New Regime: As discussed, the introduction of a Rs. 50,000 standard deduction for salaried individuals and pensioners in the new tax regime significantly enhances its appeal, especially for those who do not have substantial investments qualifying for other deductions.
  3. Increased Rebate Limit u/s 87A for New Regime: The tax rebate limit under Section 87A has been increased for the new tax regime. For FY 2023-24, individuals opting for the new regime with a taxable income up to Rs. 7 lakh will be eligible for a full tax rebate, meaning they will pay zero income tax. In the old tax regime, this rebate limit remains at Rs. 5 lakh.
  4. Increased Basic Exemption Limit in New Regime: The basic exemption limit in the new tax regime was increased from Rs. 2.5 lakh to Rs. 3 lakh for all individuals.
  5. Revised Tax Slabs in New Regime: The new tax regime also saw a rationalization of tax slabs and rates, generally making it more beneficial for lower to middle-income groups even without significant deductions.
    • Up to Rs. 3,00,000: Nil
    • Rs. 3,00,001 to Rs. 6,00,000: 5%
    • Rs. 6,00,001 to Rs. 9,00,000: 10%
    • Rs. 9,00,001 to Rs. 12,00,000: 15%
    • Rs. 12,00,001 to Rs. 15,00,000: 20%
    • Above Rs. 15,00,000: 30%
  6. Surcharge Rate Reduction for New Regime: The highest surcharge rate in the new tax regime was reduced from 37% to 25% for income above Rs. 5 crore, further reducing the maximum tax rate.

Conclusion

The financial year 2023-24 marks a pivotal shift in India’s personal income tax landscape, primarily due to the enhancements made to the new tax regime and its designation as the default option. Taxpayers are now presented with a clear choice between the traditional old tax regime, which allows a broad spectrum of exemptions and deductions, and the simplified new tax regime, which offers lower tax rates but fewer avenues for tax savings through investments and specified expenses. The introduction of the standard deduction for salaried individuals and pensioners in the new regime, coupled with the increased rebate limit and revised tax slabs, significantly boosts its attractiveness, especially for individuals with moderate income levels or those who prefer not to engage in complex tax-saving investments.

Navigating these two regimes requires a careful evaluation of one’s income, current and planned investments, and eligible expenses. While the old tax regime remains beneficial for those with substantial home loans, medical insurance premiums, and investments under Section 80C, the new regime is often more advantageous for individuals who typically do not utilize many deductions or have simpler financial structures. It simplifies tax compliance and reduces the burden of maintaining investment proofs. Ultimately, the optimal choice depends on individual financial circumstances and careful calculation, as the government aims to encourage a gradual migration towards a more straightforward tax system.