Old Tax Regime vs New Tax Regime: Which One Should You Opt?

Income Tax is a direct tax levied by the Central Government of India on the income earned by individuals, businesses, or any other entities. India’s income tax system offers two options to file income taxes– the New Tax Regime and the Old Tax Regime. 

Calculating income tax and deciding which tax regime you should opt for in FY 2023-24 can be a daunting task. Many taxpayers, just like you, are confused about which regime would be beneficial to them. 

In this blog, we’ll understand both tax regimes, deductions, and exemptions under both the regimes, and determine which tax regime should you opt for based on your income. Are you ready to make an informed decision? Let’s go!

​New Tax Regime​

In the Union Budget of 2020, the government introduced a new tax regime. This new tax regime has slightly altered tax slabs and concessional tax rates, but it has limited tax exemptions and deductions. Those who opt for the new tax regime cannot claim various deductions and exemptions such as HRA, LTA, 80C, 80D, etc., which, in turn, increases the taxable income and overall income tax. 

As a result, not many taxpayers showed interest in the new tax regime. To attract taxpayers to opt for the new tax regime, the government introduced some changes in the new tax regime in the budget of 2023. Here is the list of those changes:

1. ​Increased Tax Rebate Limit: The tax rebate under section 87A has been increased up to Rs. 7 lakhs in the new regime, which means that those who opt for the new tax regime and have an income up to Rs. 7 lakhs have to pay no taxes.
2. Standard Deduction: Every salaried employee can claim a deduction of Rs. 50,000. Earlier, this standard deduction was only accessible under the old tax regime. Adding this to the rebate increases the limit of tax-free income up to Rs. 7.5 lakhs.
3. Family Pension: Those who have a family pension can claim a deduction of Rs. 15,000 or 1/3rd of the pension, whichever is lower.
4. Reduced Surcharge Limit: Surcharges for an individual having an income of over 5 crores has been reduced from 37% to 25%. This reduces their effective tax rate from 42.74% to 39%.
5. Leave Encashment Exemption: The tax exemption limit for leave encashment has been raised from Rs. 3 lakh to Rs. 25 lakh for non-government salaried employees.
6. Basic Tax Exemption Limit: The basic tax exemption limit under the new tax regime has been increased to Rs. 3 lakhs from Rs. 2.5 lakhs under the old tax regime.
7. ​Default Regime: For FY 2023-24, the new tax regime will be set as the default. But you always have an option to choose between these two. If you want to continue with the old tax regime, then you’ll have to submit the income tax return along with form 10 IEA.
8. Simplified Tax Slabs and Reduced Tax Rates: 
   The new tax regime provides a simplified tax structure with lower tax rates. Here are the tax slabs and tax rates for the new tax regime:

​Old Tax Regime​

The old tax regime, also known as the regular regime, offers a traditional tax structure with several deductions and exemptions. There are around 70 deductions and exemptions that allow you to reduce your taxable income, thereby lowering your tax liability.

Some common tax-saving deductions available under the old regime include:

• ​Investments under Section 80C (e.g., Public Provident Fund, Equity Linked Savings Schemes)
• House Rent Allowance (HRA)
• Interest paid on home loan
• Medical insurance premiums​

By claiming these deductions, you can significantly reduce your tax burden. However, the old regime also comes with slightly higher tax rates compared to the new regime.

Comparison for Tax Rates Between the Old Tax Regime and the New Tax Regime​

​Deductions and Exemptions Under the Old Tax Regime​

​It is important to be aware of all the exemptions and deductions in order to make an informed decision. Here’s the list of some common deductions and exemptions under the old tax regime:

1. Deductions under Chapter VI-A
   1. Section 80C: This allows deductions for investments made in various schemes like Public Provident Fund (PPF), Equity Linked Savings Schemes (ELSS), National Savings Certificate (NSC), Unit Linked Insurance Plans (ULIPs) with a minimum lock-in period of 5 years, tuition fees for your children, and repayment of principal amount on a home loan. The maximum deduction under this section is Rs. 1.5 lakh. Note: If you invest in mutual fund SIPs, it can help you save taxes. Learn how!
   2. Section 80CCD(1B): This offers an additional deduction of up to Rs. 50,000 for contributions made to your National Pension System (NPS) account.
   3. Section 80D: This allows deductions for health insurance premiums paid for yourself, your spouse, dependent parents, and dependent children. The deduction limit varies depending on the taxpayer's age and the person insured.
   4. Section 80G: This allows deductions for donations made to charitable institutions or for specific social causes. The deduction amount typically has a limit as a percentage of your total income.
   5. ​Section 24: This allows deductions for interest paid on a home loan taken for purchasing or constructing a residential property. The deduction limit varies depending on the loan amount and property type.
2. House Rent Allowance
   
3. ​Leave Travel Allowance
   
4. ​Standard Deduction
5. Entertainment Allowance and Professional Tax
6. Deduction on Family Pension Home​
   

​Note: Remember, this is not an exhaustive list, and it's always recommended to consult a tax advisor for personalised advice based on your specific circumstances.

Deductions and Exemptions Under the New Tax Regime​

1. ​Standard Deduction of Rs. 50,000
   
2. Interest on Home Loan for Let-out Property (Section 24b)
3. Employer’s contribution to NPS (Section 80CCD(2))
4. All contributions to Agniveer Corpus Fund - 80CCH
5. Deduction on Family Pension Income (Section 57(iia))
6. Exemption on Leave encashment under section 10(10AA)

The new regime offers a lower tax burden through reduced tax slabs but eliminates most deductions and exemptions that could significantly lower your taxable income.

​Examples of Which Tax Regime is Better For Salaried Employees in Different Salary Brackets​

If Annual Salary is less than 5 Lakhs​

Let's consider the case of Mr. Prateek Mehra, who works at a marketing firm. He earns a salary of less than Rs. 5 lakhs per annum.

Conclusion: In this case, you can choose either of the regimes.

​If Annual Salary is 10 lakhs

Let’s consider the case of Disha Sharma, who works as a software developer in an IT-firm based out of Bangalore. Disha’s annual income is 10 lakhs per annum. 

Please note that Disha is living in Bangalore in her parent’s house and hence the HRA will be taxable. For instance, let’s consider she is investing Rs. 1,200 in NPS every month.

Conclusion: As you can clearly see, the new tax regime is beneficial for Disha.

​If Annual Salary is 40 lakhs​

Vikas Gupta is a senior manager at a multinational corporation, earning a salary of Rs. 30 lakhs per annum. Vikas owns his apartment in Noida and hence the HRA is taxable. 

He has no additional income other than his salary. It’s important to note that he pays a monthly premium of Rs. 2,000 for the health insurance covering his family. 

Conclusion: For Vikas, the old tax regime is more beneficial.

​Some Estimates To Help You Choosing The Best Regime For You

1. If total deductions < 1.5 lakhs (New Tax Regime)
2. If total deductions > 3.7 lakhs (Old Tax Regime)
3. If total deductions range between 1.5 lakhs and 3.75 lakhs, your income level will determine which regime is best for you.

​Old Tax Regime vs New Tax Regime– Which is Better?​

Choosing the right tax regime requires a clear understanding of how they differ. Here's a table summarizing the key aspects of both regimes:

Both the regimes are correct at their respective places. Since the major differentiators are the deductions and exemptions, the decision will be driven by  carefully considering these factors.

You have to deduct all the eligible exemptions and deductions from your gross salary to determine your net taxable income. Calculate the tax liability on your net taxable income under both the regimes and compare them. Learn how to calculate income tax for salaried employees: a step by step guide for beginners.

After calculating the tax liability under both the regimes. it’s quite obvious to choose the regime with the lower tax liability.

Remember, you must inform your employer about your tax regime preference so that TDS can be deducted from the salary.

​To Wrap it Up!​

The world of income tax can be a complex one, especially when faced with the choice between the old and new tax regimes. Both regimes have their own advantages and disadvantages. 

The new tax regime is more simplified and beneficial for those who don't have many deductions and aren’t eligible for various exemptions. While the old tax regime promotes taxpayers to invest and build an investment habit, which is a good aspect. If we compare the tax slabs and tax rates, the new tax regime has altered tax rates. 

By understanding the key features of both the old and new regimes, and considering factors like your income, investment habits, and deductions, you can make an informed decision.

If you’re still feeling stuck, we recommend consulting a tax professional to choose the best regime for your conditions.

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