Old Vs New Tax Regime: Which is Better?
The Indian income tax system levies a tax on individual taxpayers depending on their income level. However, from 2020-21, the method of levying taxes changed.
A new tax regime was announced wherein the tax rates were reduced significantly, along with a massive reduction in tax-saving opportunities. The government has incorporated many incentives in the 2023 Budget to support implementing the new system.
If you often wonder new regime vs old regime, which one is better? Let’s read on to find out more here, as the case may differ for different income slabs.
In the blog, we will first learn about the difference between the tax rates of both regimes, the difference in the deductions available, and practical examples of how the new regime will make a difference for each tax slab.
New Tax Regime
Beginning April 1, 2020 (FY 2020-21), the Government of India implemented a new optional tax rate system for individuals and Hindu undivided families (HUF).
Consequently, Section 115 BAC was added to the Income Tax Act of 1961 (the Act), which mandated lower tax rates for respective taxpayers and HUFs who did not take certain tax deductions or exemptions.
Based on the revisions suggested in the Union Budget 2023, the new tax regime has been designated as the default, and taxpayers must choose the old tax regime if they decide to use it.
However, those who choose the new system cannot claim various exemptions and deductions, including HRA, LTA, 80C, 80D, etc. As a result, the new tax structure found few supporters. Therefore, the government announced five significant adjustments in Budget 2023 to persuade taxpayers to accept the new system. They are as follows:
-
Increased Tax Rebate Limit
A total tax rebate of up to 7 lakhs has been introduced. Under the previous tax regime, this threshold was set at five lakhs. This implies that people earning up to Rs 7 lakh would not have to pay any tax under the new regime!
-
Simplified Tax Slabs
The tax exemption limit has been raised to 3 lakhs, and the new tax slabs are as follows. Here are the new vs old tax regime slab-
|
Annual Income |
Income Tax Slab Old Regime |
New Regime FY |
|
Up to Rs. 3 lakhs |
Nil |
Nil |
|
Rs.3 – 6 lakh |
5% |
5% |
|
Rs.6 – 9 lakh |
20% |
10% |
|
Rs. 9-12 lakh |
30% |
15% |
|
Rs. 12-15 lakh |
20% |
|
|
Rs. 15 Lakh and above |
30% |
-
Standard Deduction and Family Pension Deduction
- Salary income: The 50,000 standard deduction, previously accessible solely under the old regime, has also been extended to the new tax scheme. Together with the rebate, this amounts to 7.5 lakhs in tax-free income under the new regime.
- Family pension: Those receiving a family pension are eligible for a deduction of ₹15,000 or 1/3rd of the pension, whichever is lower.
- Surcharge for High-Net-Worth Individuals Cut: The surcharge rate for income over five crores has been cut from 37% to 25%. This change reduces their effective tax rate from 42.74% to 39%.
- Higher Leave Encashment Exemption: The exemption limit for non-government workers has been increased eightfold, from 3 lakhs to 25 lakhs.
Old Tax Regime
The tax system that existed before the implementation of the new regime is the old tax regime. Approximately 70 exclusions and deductions are available under this system, including HRA and LTA, that can reduce your taxable income and minimise your tax payments.
Section 80C, the most prevalent and substantial deduction, allows for a reduction in the taxable income of up to Rs.1.5 lakh. Additionally, the taxpayers are offered the option of choosing between the existing and new tax regimes.
List of a Few Exemptions and Deductions in Old Tax Regime Slabs
Here’s the list (not exhaustive) of exemptions-
- Leave Travel Allowance
- House rent allowance
- A standard deduction of Rs 50,000 was available for salaried individuals.
- Deductions available under Section 80TTA/80TTB (on interest from savings account deposits )
- Entertainment allowance deduction and professional tax (For government employees)
- Tax relief on interest paid on home loan for self-occupied or vacant property u/s 24
- Deduction of Rs 15000 permitted from family pension under clause (ii a) ( Section 57)
- Tax-saving investment deductions under Chapter VI-A (80C,80D, 80E,80CCC, 80CCD, 80D, 80DD, 80DDB,, 80EE, 80EEA, 80EEB, 80G, 80GG, 80GGA, 80GGC, 80IA, 80-IAB, 80-IAC, 80-IB, 80-IBA, etc) (Except, deduction under Section 80CCD(2)—employers contribution to NPS, and Section 80JJA) and so on. These popular tax-saving investment options include ELSS, NPS, PPF, and a tax break on insurance premiums.
One can still claim a deduction under sub-section (2) of section 80CCD, basically an employer’s contribution towards an employee’s account in NPS and section 80JJAA ( for new employment).
Also note that if the employee’s contribution to EPF and NPS exceeds Rs 7.5 Lakh in the financial year in question, then the employee is liable to pay tax.
List of Significant Exemptions Enclosed in the New Tax Regime
- Income from Life Insurance
- Agricultural Income
- Standard reduction on rent
- Retrenchment compensation
- Leave encashment on retirement
- VRS proceeds up to Rs 5 lakhs
- Death cum retirement benefit
- Money obtained as a scholarship for education, etc.
Difference Between Old Vs New Tax Regime: Which should a person choose?
New tax regime vs old, which is better, is a tough question to answer since there's no one correct answer.
The choice of switching to the new tax regime or staying in the old tax regime, or whether the regime is best for you, must be based on the tax savings deductions and exemptions available in the previous tax system.
Old Vs New Regime Example
Suppose an individual has an income of Rs. 8,00,000. The following table shows the tax calculation under the new and old regimes:
|
Particulars |
Tax under Old Regime (In Rs.) |
Tax under New Regime (AY 2024-25 onwards) (In Rs.) |
|
Salary |
8,00,000 |
8,00,000 |
|
Less: Standard Deduction |
(50,000) |
(50,000) |
|
Taxable Income |
7,50,000 |
7,50,000 |
|
Total Tax |
(0%*2,50,000) + (5%*2,50,000) + (20%*2,50,000) |
(0%*3,00,000) + (5%*3,00,000) + (10%*1,50,000) |
|
= 62,500 |
= 30,000 |
|
|
Cess @4% |
2,500 |
1,200 |
|
Total Tax Inclusive Of Cess |
65,000 |
31,200 |
Some Estimates: Old Regime vs New Regime
Here are some estimates to help you decide between the existing and new tax regimes:
- The new regime will be advantageous when total deductions are less than 1.5 lakhs.
- When total deductions exceed 3.75 lakhs, the old regime will be beneficial.
- When total deductions range from 1.5 lakhs to 3.75 lakhs: this is determined by your income level.
Summing Up Old Tax Regime Vs New Tax Regime
People often wonder about the difference between old and new tax regime. The new income tax regime would cater to people who do not want excessive deductions or do not wish to avoid tax preparation burdens. This may include nonsalaried taxpayers (including consultants) who are ineligible for Section VIA exemptions and deductions.
It may also include older individuals who do not get a pension from their employment and are thus ineligible for the INR 50,000 standard deduction. On the other hand, senior citizens get a significant amount of their interest income and are entitled to INR 50,000 in interest income under the newly enacted Section 80TTB. Therefore, they would be more secure under the old scheme.
Both old vs new tax regime have benefits as well as drawbacks. Before deciding, understand the differences between the old and new tax regimes. The previous tax structure instils in a taxpayer the habit of saving. The new tax structure benefits employees who earn less and invest less, resulting in fewer deductions and exemptions.
The new tax system is safer and more straightforward, with fewer records and less potential for tax evasion fraud. However, because everyone has their unique set of deductions and exemptions, the two regimes must be compared to find the best for everyone.