Old Tax Regime Vs New Tax Regime - What Should NRIs Choose?

Old tax regime or new tax regime? A common question asked by most NRIs. Both regimes have their own set of advantages and disadvantages, and the optimal choice depends on your individual circumstances. In this article we try to demystify the old and new tax regimes and provide a detailed comparison between the two regimes, focusing specifically on NRIs' perspectives.

May 10, 2024
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6 mins

The Indian tax system has undergone significant changes with the introduction of the new tax regime, leaving many NRIs perplexed about which option to choose when filing their income tax returns – the old regime or the new regime.

What is the Old Tax Regime?

The Old Tax Regime follows India's conventional income tax calculation method. It offers various deductions and exemptions under different sections of the Income Tax Act, such as HRA (House Rent Allowance), Section 80C (Investments), Section 24 (Home Loan Interest), and many more.

Opting for the old tax regime offers flexibility in tax planning through investments and expenses that can reduce your overall taxable income.

What is the New Tax Regime?

Introduced in the 2020 Budget, the New Tax Regime offers a simplified tax structure with lower tax rates. However, it comes at the cost of foregoing most deductions and exemptions available under the Old Regime.

Under the new tax regime (introduced in Budget 2023), your Indian income up to Rs. 3,00,000 is exempted from income tax.

Indian residents can claim tax rebates on income up to Rs. 7,00,000 and Rs. 50,000 as standard deduction (for salaried employees). This tax rebate and standard deduction are not applicable for NRIs.

Old Tax Regime Vs New Tax Regime – Key Differences for NRIs

Debt Mutual Fund Information
Aspect Old Tax Regime New Tax Regime
Tax Rates Higher tax rates with deductions and exemptions Higher tax rates with deductions and exemptions
Deductions and Exemptions Available under various sections of the Income Tax Act Available under various sections of the Income Tax Act
Complexity Relatively complex due to multiple deductions and exemptions Relatively complex due to multiple deductions and exemptions
Flexibility Offers flexibility in tax planning and optimizing deductions Offers flexibility in tax planning and optimizing deductions

Old Tax Regime Vs New Tax Regime – Which is Better for NRIs?

Determining which regime is better for NRIs depends on various factors such as income level, nature of income, investment portfolio, and personal financial goals. Mainly, the new tax regime may be beneficial for those with minimal tax saving investments and deductions. The old tax regime may be suitable for those taking the maximum benefit from the available income tax deductions and exemptions.

Scenarios Where Old Tax Regime is Better for NRIs

The old tax regime may be more beneficial if you have significant deductions and exemptions to claim.

  • Investment in Tax-saving Instruments: If you invest in tax-saving instruments under Section 80C.
  • Home Loan Interest: If you are paying substantial home loan interest, you can benefit from deductions under Section 24.

Scenarios Where New Tax Regime is Better for NRIs

  • If you have a lower taxable income and minimal deductions, the new tax regime will be advantageous due to lower tax rates. When total deductions are less than Rs. 1.5 lakhs.
  • If you are seeking simplicity and ease of compliance.

Old Tax Regime Vs New Tax Regime – Tax Slabs

Debt Mutual Fund Information
Old Tax Slabs Old Income Tax Rates New Tax Slabs New Income Tax Rates
Up to Rs 2.5 lakh NIL Up to Rs 3 lakh NIL
Rs 2.5 – Rs 5 lakh 5% Rs 3 lakh – Rs 6 lakh 5%
Rs 5 – Rs 10 lakh 20% Rs 6 lakh – Rs 9 lakh 10%
Above Rs 10 lakh 30% Rs 9 lakh – Rs 12 lakh 15%
Rs 12 lakh – Rs 15 lakh 20%
Above Rs 15 lakh 30%

Conclusion

Choosing between the old and new tax regimes is crucial for NRIs filing income tax in India. While the old regime offers more deductions and exemptions, the new regime provides simplicity and lower tax rates.

Before making a decision, you should carefully evaluate your income sources, investment portfolio, and long-term financial objectives. Consulting with a tax advisor will help you choose the most suitable tax regime.

Frequently Asked Questions (FAQs)

Which income is taxable for NRIs?

Income that is accrued, deemed to accrue, or received in India is subject to taxation for NRIs. However, income generated outside India from a business controlled or a profession established within India remains untaxed. The taxable income for NRIs includes:

  • Salary received for services provided in India.
  • Income from residential property in India, whether rented or vacant.
  • Capital gains from the transfer of property or assets in India.
  • Income from fixed deposits or bank savings accounts in India. Interest earned on NRO (non-resident ordinary) accounts is taxed in India. While interest on NRE (non-resident external) and FCNR (foreign currency non-resident) accounts remains tax-free.

When is an NRI required to file tax returns?

For both NRIs and residents, filing tax returns is mandatory if the total annual income exceeds the basic exemption limit of Rs. 2.5 lakh (old tax regime) or Rs. 3 lakh (new tax regime). The deadline for filing returns is July 31 of the assessment year.

Do NRIs need to pay advance tax?

If your tax liability as an NRI exceeds Rs. 10,000 in a financial year, you must pay advance tax. You will be charged interest under Sections 234B and 234C if you do not pay advance tax.

Which ITR forms are they required to fill out?

If you earn no income from business or profession, you must file returns using the ITR 2 form. However, if you earn such income, you need to file ITR 3.

Which exemptions and deductions are available to NRIs?

You have the option to choose between the old tax regime or the new regime with lower tax rates under Section 115BAC of the Income-tax Act. Under the former, you are eligible for various exemptions, including:

  • Section 80C up to Rs. 1.5 lakh (including children's tuition fees, the premium for insurance policies, ULIPs, ELSS, and principal payment of home loan).
  • Section 80D: Premium on medical insurance up to Rs. 25,000 for yourself, spouse and family and Rs. 25,000 for parents.
  • Section 80CCD (1B): Additional exemption on NPS up to Rs. 50,000
  • Section 80E: Interest on education loan, no maximum limit.
  • Section 80G: Eligible donations qualify for an exemption of up to 50% or 100%, depending on the donation amount.
  • Section 80TTA: Interest on savings bank account, up to Rs. 10,000
  • Section 24: Interest on the home loan, up to Rs. 2,00,000
  • Section 80EE: Additional exemption on home loan interest, up to Rs. 50,000

If tax has been paid abroad, will the NRIs have to pay it in India?

NRI's foreign income is not taxable in India.

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