How much income is exempt from tax?

How Much Income is Exempt From Tax in India?

Many people think there's one simple answer to how much income is exempt from tax. This is a common mistake. The actual amount of your income that is tax-free depends entirely on two things: your age and the tax regime you choose. Understanding the rules of Income Tax in India is the first step to saving money legally.

For the financial year 2023-24 (assessment year 2024-25), the answer is different for the New Tax Regime and the Old Tax Regime. Let’s break down the exact numbers so you know where you stand.

Tax Exemption Under the New Tax Regime

The New Tax Regime is now the default option for taxpayers. If you do not actively choose the old regime when filing your return, you will be taxed under this new system. It offers lower tax rates but gives up most of the common deductions and exemptions.

So, how much is tax-free here?

The basic exemption limit is 3 lakh rupees for all individuals, regardless of age. This means if your net taxable income is up to 3 lakh rupees, you pay zero tax.

However, there is a special provision that makes it even better. A tax rebate under Section 87A is available for those with a taxable income up to 7 lakh rupees. This rebate effectively makes your tax liability zero. So, for all practical purposes, if you are in the new regime and your annual income is 7 lakh rupees or less, you will not pay any income tax.

Keep this in mind: The tax is calculated, but the rebate cancels it out. If your income goes even one rupee over 7 lakh, you lose the rebate and have to pay tax on the entire amount above the 3 lakh rupees exemption limit.

New Tax Regime Slabs (FY 2023-24)

Here is a simple table to show you the tax rates that apply if your income exceeds 7 lakh rupees.

Exemption Limits in the Old Tax Regime

The Old Tax Regime is still available, but you have to specifically choose it. This regime has higher tax rates but allows you to claim a wide range of deductions and exemptions, like those under Section 80C, 80D, and for House Rent Allowance (HRA).

Under this system, the basic exemption limit is based on your age.

1. For Individuals below 60 years: The tax-exempt income limit is 2.5 lakh rupees.
2. For Senior Citizens (60 to 80 years): The tax-exempt income limit is 3 lakh rupees.
3. For Super Senior Citizens (above 80 years): The tax-exempt income limit is 5 lakh rupees.

Just like the new regime, the old regime also has a rebate under Section 87A. Here, if your net taxable income is up to 5 lakh rupees, the rebate makes your tax liability zero. So, even if the basic exemption is 2.5 lakh rupees, you effectively pay no tax on income up to 5 lakh rupees.

Old Tax Regime Slabs (FY 2023-24)

Here are the slabs for individuals below 60 years of age.

For more details on specific slabs for senior citizens, you can check the official tax slab information on the Income Tax Department's portal.

How Deductions Increase Your Tax-Free Income

The real power of the Old Tax Regime lies in deductions. These deductions reduce your gross total income, bringing down your taxable income. If you can lower your taxable income to 5 lakh rupees or less, you pay zero tax.

Here are some of the most powerful deductions available only under the old system:

• Standard Deduction: Salaried individuals and pensioners get a flat deduction of 50,000 rupees. This is also available in the new regime.
• Section 80C: You can claim up to 1.5 lakh rupees for investments in things like the Public Provident Fund (PPF), Equity Linked Savings Scheme (ELSS), life insurance premiums, and home loan principal repayment.
• Section 80CCD(1B): An additional deduction of up to 50,000 rupees for contributions to the National Pension System (NPS).
• Section 80D: Deduction for health insurance premiums paid for yourself, your family, and your parents. The limit varies based on age.
• House Rent Allowance (HRA): If you live in a rented house, you can claim an exemption on the HRA you receive from your employer.

A Practical Example

Let's say your annual salary is 8 lakh rupees and you choose the Old Tax Regime.

1. Your gross income is 8,00,000 rupees.
2. You immediately claim the Standard Deduction of 50,000 rupees. Your income is now 7,50,000 rupees.
3. You invested 1,50,000 rupees in PPF under Section 80C. Your income is now 6,00,000 rupees.
4. You also contributed 50,000 rupees to NPS under Section 80CCD(1B). Your income is now 5,50,000 rupees.
5. You paid a health insurance premium of 25,000 rupees under Section 80D. Your income is now 5,25,000 rupees.

Even with these deductions, your taxable income is above 5 lakh rupees, so you would have to pay some tax. But if you also had an HRA claim of, say, 25,000 rupees, your final taxable income would be 5,00,000 rupees. At this level, the tax rebate under Section 87A kicks in, and your tax liability becomes zero. In this scenario, your tax-exempt income effectively became 8 lakh rupees!

Which Regime Should You Choose?

There is no single best answer. Your choice depends on your financial habits.

• Choose the New Tax Regime if: You do not make many tax-saving investments. You prefer simplicity and lower headline tax rates. Your income is 7 lakh rupees or slightly above, and you can't claim enough deductions to make the old regime better.
• Choose the Old Tax Regime if: You make full use of deductions like 80C, 80D, HRA, and home loan interest. You are a disciplined investor and want to use these tools to reduce your tax outgo.

The best approach is to calculate your tax liability under both regimes before making a final decision. Most online tax calculators can do this for you quickly. Take a few minutes to run the numbers; it could save you thousands of rupees.