Lawyers, doctors, engineers, architects, artists, actors and other professionals may all be subject matter experts in their respective domain, and proprietor businessmen may have entrepreneurial acumen where it concerns their respective businesse, but when it comes to making a right choice between the old and the new personal income tax regime, especially, after the Union budget 2023 announcements, they are all equally puzzled and confused, as is the salaried class.
Though professionals and businessmen won’t have the benefit of standard deduction of ₹50,000 in the new regime, just like the salaried class, they are eligible for the reduced tax slab rates, increased basic exemption limit from ₹2.5 lakh to ₹3 lakh, and the increased rebate limit, from the existing ₹5 lakh to ₹7 lakh under section 87A, in the new regime, with effect from fiscal year 2024.
But all these benefits would come at the cost of their foregoing certain income tax deductions like those available (under section 80C of chapter VIA) for investments in equity linked savings scheme, or ELSS, public provident fund, unit-linked insurance plans, or ULIPs, and any insurance premium, or under section 80D for mediclaim premium, home loan principal repayments and interest payments in respect of self-occupied property, section 80QQB deduction in respect of royalty, additional depreciation under Section 32(1)(iia) etc.
So, like the salaried class, businessmen and professionals, too, are confronted with a tough choice: whether to opt for the old regime with available deductions or the new regime with revised and lower tax slab rates.
They should, however, look at breakeven points (see table) to make a decision on the specified deductions that are required to be claimed by them in the old regime to arrive at a breakeven with the reduced tax liability in the new personal tax regime.
If the quantum of available deductions becomes lesser than the breakeven points of deductions (see column 2 in the table), then the tax liability in the old regime becomes greater than that in the new regime and, as such, the new regime becomes more beneficial in terms of reduced tax outflows.
Conversely, if the quantum of available deductions becomes greater than the said breakeven points, then the tax liability in the old regime becomes lesser than that in the new regime and, as such, the old regime becomes more beneficial in terms of reduced tax outflows.
Further, the threshold income limit for presumptive taxation scheme in respect of small business under section 44AD has been increased from ₹2 crore to ₹3 crore, and in respect of professionals, this has been increased from ₹50 lakh to ₹75 lakh under section 44ADA.
In the presumptive taxation schemes under section 44AD and 44ADA, the proprietor businessman declares the income at 6% and 8% while professionals declare the income at 50% of the total turnover, on presumptive basis, without claiming any business expenditure, respectively.
In terms of tax slab rates, the new personal tax regime under section 115BAC(1A) is naturally the clear choice for professionals and businessmen opting for presumptive income schemes.
However, Chapter VIA deductions can also be claimed in presumptive income schemes under section 44AD and 44ADA. Therefore, the break-even point analysis in the above table, will also help them in making an informed and tax optimal decision.
Also, it is important to note that from fiscal year 2024, a professional or a proprietor businessman, opting for the old regime with available deductions, is required to file an electronic declaration in the prescribed form before the due date of filing income tax returns, and such people will have just one opportunity to switch back to the new regime in subsequent years.
Mayank Mohanka is the founder of TaxAaram India and a partner at S M Mohanka & Associates.