The government aimed to simplify the tax structure and attract taxpayers towards the new system by offering lower tax rates and fewer exemptions. However, this has led to confusion among taxpayers regarding the choice between the old and new tax regimes.
This article comprehensively compares the Old Vs New Tax Regime in India, considering the changes introduced in the Union Budget 2023. Indian Income Tax System has seen a significant shift with the introduction of a New Tax Regime in the financial year 2020-21.
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What is Old Tax Regime?
Old Tax Regime is the tax system that existed before the introduction of the New Regime. Under this regime, taxpayers could avail of numerous exemptions and deductions, including House Rent Allowance (HRA), Leave Travel Allowance (LTA), deductions under Sections 80C, 80D and more.
These deductions helped in reducing the taxable income and minimizing the overall tax liability.
What is New Tax Regime?
New Tax Regime was introduced in the financial year 2020-21, with the aim of simplifying the tax structure and offering lower tax rates to taxpayers. However, to avail themselves of the concessional tax rates in the new regime, taxpayers had to forgo several exemptions and deductions that were available under the old rule. This led to a dilemma among taxpayers regarding the choice between the two tax regimes.
In the Union Budget 2023, the government made several changes to the New Tax Regime to make it more attractive to taxpayers.
What are the key Changes in New Tax Regime?
The government introduced various incentives in the Budget 2023 to encourage taxpayers to adopt the New Tax Regime. Some of the key changes are as follows:
- The tax rebate limit under Section 87A has been increased to INR 7 lakh from the earlier INR 5 lakh. This means that individuals earning up to INR 7 lakh annually will not have to pay any tax under the new regime.
- The tax exemption limit has been raised to INR 3 lakh, and the new tax slabs have been revised. The new tax slabs range from 0% to 30%, with the lowest slab starting at INR 3 lakh and the highest tax rate applicable on income above INR 15 lakh.
- The standard deduction of INR 50,000, previously available only under the old regime, has been extended to the new tax regime as well. Additionally, those receiving a family pension can claim a deduction of INR 15,000 or 1/3rd of the pension, whichever is lower.
- The surcharge rate on income over INR 5 crore has been reduced from 37% to 25%. This change reduces the effective tax rate for such individuals from 42.74% to 39%.
- The exemption limit for non-government employees has been increased from INR 3 lakh to INR 25 lakh.
Tax Rates: Old Vs New Tax Regime
The tax rates under both the Old Vs New Tax Regime are different. The Old Tax Regime had four tax slabs, ranging from 5% to 30%, while the New Tax Regime have five tax slabs, ranging from 0% to 30%.
Here’s a comparison of the tax rates under old Vs new Tax Regime for the financial year 2023-24:
| Income Slab | Old Tax Regime (Optional) | New Tax Regime (Default tax scheme) |
|---|---|---|
| INR 0-2.5 Lakh | Nil | Nil |
| INR 2.5-3 Lakh | 5% | Nil |
| INR 3-5 Lakh | 5% | 5% |
| INR 5-6 Lakh | 20% | 5% |
| INR 6 – 9 Lakh | 20% | 10% |
| INR 9 – 10 Lakh | 20% | 15% |
| INR 10-12 Lakh | 30% | 15% |
| INR 12 – 15 Lakh | 30% | 20% |
| INR 15 lakh & above | 30% | 30% |
Exemptions and Deductions: Old Vs New Tax Regime
The availability of exemptions and deductions is a crucial factor in deciding between Old Vs New Tax Regime. Here’s a comparison of some popular exemptions and deductions under both regimes:
| Exemption/Deduction | Old Tax Regime | New Tax Regime |
|---|---|---|
| House Rent Allowance (HRA) | Yes | No |
| Leave Travel Allowance (LTA) | Yes | No |
| Deductions under Section 80C, 80D, etc. | Yes | No |
| Standard Deduction | Yes | Yes |
| Family Pension Deduction | Yes | Yes |
| Transport Allowance | Yes | Yes |
| Conveyance Allowance | Yes | Yes |
| Travel & tour Allowance | Yes | Yes |
| Daily Allowance | Yes | Yes |
1. 80JJAA: Enterprises can claim deductions against additional staff cost during the assessment Year
2. 80CCD(2) : Employers contribution to NPS for benefit of Employees
3. 80CCH(2) : Deduction in respect of contribution to Agnipath Scheme made by central Government
Which Tax Regime is better?
The choice between the old vs new tax regime depends on an individual’s income level, deductions, and exemptions. It’s essential to evaluate and compare the tax liability under both regimes before making a decision.
If a taxpayer has investments in tax-saving instruments, pays premiums on life or medical insurance policies, has children’s school fees, home loan principal repayment, etc., and avails the benefit of deductions for HRA, LTA, etc., it may be more beneficial to opt for the old tax regime since the benefits of deductions and exemptions can be availed.
On the other hand, if a taxpayer does not have significant tax-saving investments or deductions, the new tax regime with its lower tax rates and simpler structure might be more beneficial.
Threshold for deciding Old and New Tax Regimes
The break-even threshold is the point where the tax liability under both the old vs new tax regime is the same. If your total eligible deductions and exemptions under the old tax regime are higher than the break-even threshold for your income level, it is advisable to stay in the old regime. On the other hand, if the break-even threshold is higher, then moving to the new tax regime is more beneficial.
Here’s a table to help you understand the break-even threshold for different income levels:
| Annual Income | Break-even Threshold |
|---|---|
| INR 7 lakh | INR 1.5 lakh |
| INR 10 lakh | INR 2.62 lakh |
| INR 12 lakh | INR 3 lakh |
| INR 15 lakh | INR 3.58 lakh |
| INR 20 lakh | INR 3.75 lakh |
Switching between Regimes: Old vs New Tax Regime
Taxpayers have the option to switch between old vs new tax regime. However, the frequency of switching depends on the source of income during the year.
- Where income includes business or professional income: If an individual or HUF has income from a business or profession, once they opt for the new tax rates for a financial year, the new rates shall apply for subsequent years. However, they can switch back to the old tax regime if their circumstances change. This switch-back option is available only once a lifetime unless the taxpayer ceases to have any income from a business or profession.
- Where income does not include business or professional income: If an individual or HUF does not possess income from a business or profession, the selection can be made on a year-on-year basis. For individuals with salaried income, the employer must withhold tax before paying the salaries. However, the employee must inform the employer regarding their preferred tax rates.
An employee may choose between the old vs new tax regime at the beginning of the year and intimate the employer, or at the time of joining new employment during the year.
However, at the time of filing the personal tax return, the employee can change the tax regime.
Conclusion
In summary, the government’s effort to simplify the tax structure and attract taxpayers through lower rates in the New Tax Regime has created a dilemma for individuals, leading to confusion about choosing between the old vs new tax regime. The Budget 2023 introduced changes to make the New Tax Regime more appealing, including increased exemptions, revised tax slabs, and reduced surcharge rates.
The decision between the old vs new tax regime depends on factors like income, deductions, and individual circumstances, with a break-even analysis helping individuals make an informed choice based on their financial situation.
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FAQs
1. What is the primary difference between old vs new tax regime?
The main distinction lies in the tax structure. The old regime offers numerous deductions and exemptions, resulting in a complex tax structure. In contrast, the new regime simplifies the process by eliminating most deductions and offering lower tax rates.
2. Which taxpayers benefit more from the new tax regime?
Generally, individuals with a simple financial portfolio and those who do not wish to engage in extensive tax planning may find the new regime more beneficial. Salaried individuals with a straightforward income source may prefer the simplicity of the new tax structure.
3. Are there any specific deductions that are available only in the old tax regime?
Yes, several deductions such as HRA (House Rent Allowance), standard deduction, and various exemptions under sections like 80C, 80D, etc., are available only in the old regime. Taxpayers need to evaluate their financial situation to determine which regime suits them better.
4. How does the new tax regime impact businesses and self-employed individuals?
The impact varies. While businesses may appreciate the simplified structure, self-employed individuals might miss certain business-related deductions available in the old regime. It’s crucial for business owners to carefully analyze their expenses and income to decide which regime aligns better with their financial goals.
5. Can taxpayers switch between the old and new tax regimes each financial year?
Yes, taxpayers have the flexibility to switch between the old and new tax regimes each financial year. However, this decision should be made after considering their financial situation, income sources, and potential tax benefits.
