This examination of income tax old regime vs new regime is important for individuals completing their income taxes. India adopted a new tax scheme designed to lower rates for the purpose of simplifying tax compliance and public participation. From the effectiveness of new tax vs old tax regime along with their pros and cons to understanding your type, our blog will help you plot your course forward.
The Income Tax New vs Old Regimes
The tax regime has existed for years and taxpayers can obtain many withholding deductions and exemptions to lower tax liability. The new tax system announced in Budget 2020 lowers tax rates by removing nearly all deductions under the existing scheme. Along with these incentives in Budget 2023, there was another portion aimed at taxpayers to adopt the new regime.
Old Tax Regime Tax Slabs & Rates
The old tax system has a conventional structure with increased rates of taxation. The income tax slabs are the following :
| Income Range | Tax Rate |
| Up to Rs 2.5 lakh | Nil |
| Rs 2.5 lakh to Rs 5 lakh | 5% |
| Rs 5 lakh to Rs 10 lakh | 20% |
| Over Rs 10 lakh | 30% |
Deductions along with Exemptions
The old regime is characterised by its lengthy list of exemptions and deductions, including:
- Section 80C: Offers deductions as much as Rs 1.5 lakh on investments in specific instruments (PPF, NSC, EPF, life insurance premiums & more).
- Section 80D: Medical insurance premium deduction.
- HRA & LTA: House rent allowance/leave travel allowance exemptions.
- Section 24 (b): As much as Rs 2 lakh deduction on home loan interest for self-occupied property.
Pros of the Old Regime
Some advantages of the old regime are:
- Beneficial for investors in tax saving instruments.
- Offers different exemptions and deductions that could reduce taxable income.
Cons of the Old Regime
Some disadvantages of the old regime are:
- Increased taxes under the new regime.
- More complicated documentation with deductions and exemptions to claim.
Understanding New Tax Regime Tax Slabs & Rates
The new tax regime provides reduced tax rates for a broader income range. The tax slabs are:
| Income Range | Tax Rate |
| Up to Rs 3 lakh | Nil |
| Rs 3 lakh to Rs 6 lakh | 5% |
| Rs 6 lakh to Rs 9 lakh | 10% |
| Rs 9 lakh to Rs 12 lakh | 15% |
| Rs 12 lakh to Rs 15 lakh | 20% |
| Over Rs 15 lakh | 30% |
Deductions along with Exemptions
The new regime eliminates most deductions and exemptions provided under the previous regime. But it allows:
- A primary deduction of Rs 50,000 for salaried people and Rs 15,000 for retirees.
- For earnings up to Rs seven lakh, claim Section 87A rebate up to Rs 25,000.
- Reduced surcharge on annual earnings over Rs five crore from 37% to 25%.
Pros of the New Regime
Some advantages of the new regime are:
- Simplified tax filing.
- Lower taxes favour higher income with fewer deductions.
Pros of the New Regime
Some disadvantages of the new regime are:
- Less deductions and exemptions.
- For those with big investments in tax-saving instruments this is less beneficial.
Old vs New Tax Regime Tax Rate Comparison
In comparison between old regime vs new regime tax, the new tax system has reduced tax rates though the existing regime has more exemptions and deductions available.
The Standard Deduction
Both regimes provide a Rs 50,000 standard deduction for salaried individuals.
Deductions along with Exemptions
The old regime allows numerous deductions and exemptions under Section 80C, Section 24 (b) HRA and LTA. The new regime, though, has decreased deductions.
An Example –
Assume a salaried individual earns Rs 12 lakh as a gross salary. Compare this to:
Old Tax Regime:
| Item | Amount |
| Gross Salary | Rs 12,00,000 |
| Standard Deduction | Rs 50,000 |
| Deduction under Section 80C | Rs 1,50,000 |
| Deduction under Section 80D | Rs 25,000 |
| Section 24 (b) | Rs 2,00,000 |
| Taxable Income | Rs 8,75,000 – Rs 8,95,000 |
| Tax Liability (Approximate) | Rs 95,000 |
New Tax Regime:
| Item | Amount |
| Gross Salary | Rs 12,00,000 |
| Standard Deduction | Rs 50,000 |
| Taxable Income | Rs 11,50,000 |
| Tax Liability (Approximate) | Rs 1,05,000 |
In this particular example, available deductions make the old tax regime more tax effective in comparing between new tax regime vs old.
How to Pick the Right Tax Regime
The choice between the new tax vs old tax regime is complicated by several factors:
Goals for Investments
The old regime might be better if you own substantial investments in tax-saving instruments like PPF, EPF and insurance. The new regime is better in case you would like a simpler process with flexible investments.
Income Level
- Up to Rs 7.5 lakh income: The new regime includes zero tax on deductions and rebates.
- Greater incomes: The new regime benefits from reduced tax rates.
Deductions along with Exemptions
If you have large deductions under Section 80C, Section 24 the old regime is probably better. The new regime works for those with fewer deductions.
Breakeven Threshold
To choose between old vs new tax regime, compare your tax liability under each regime:
- Find net taxable income under the old regime.
- Determine tax liability under the brand new regime in the lower rates.
- Pick the regime with the lower tax liability.
The breakeven threshold is the point at which the two regimes have no different tax liability. If your deductions go over the breakeven limit, the old regime works better. Otherwise, the new regime is preferred.
Closing Thoughts
The choice between the new vs old tax regimes is determined by your own financial situation, investment objectives & income level. Make use of a new vs old tax regime calculator to determine your tax obligation under both regimes or even ask a tax specialist for personalised guidance. Choose wisely for compliance and savings.
FAQs
1. Can I change between new and old tax regimes?
Yes, salaried individuals can change regimes every financial year but those with company income can change to the existing regime only once after selecting the brand new one.
2. Do I need to file a different ITR form for the brand-new tax regime?
No, the same ITR form is used for both regimes. But you must specify what tax regime you select when you file your income tax return.
3. For high deductions – which tax regime is better?
The old regime (with its lengthy list of deductions including Section 80C, 80D and 24(b)) is generally preferable for those with big eligible deductions.
4. How does the standard deduction function under both tax regimes?
The new and old regimes present a simple deduction of Rs 50,000 for salaried people and Rs 15,000 for household pensioners.
5. Are there any exemptions under the new tax regime?
The new regime provides few exemptions. Those few exemptions consist of regular deduction, a Section 87A rebate and a reduced surcharge.
6. Will taxpayers claim HRA and LTA exemptions under the new tax regime?
No, the brand new tax system doesn’t permit HRA and LTA exemptions nor the majority of the other exemptions in the existing regime.
7. What should I consider between the new and old tax regimes?
Compare your investment goals, simplicity preference, eligible deductions and income level to see which tax regime lowers your tax liability.
