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New Tax Regime vs Old: Which Is Better?

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Budget 2023 was crucial to every Indian taxpayer. Do you know why? The government decided the new tax regime introduced on 1st April 2020 would be the default option. The new tax regime offers lower tax rates but narrows the scope of tax deductions and exemptions.

The new regime is optional, and taxpayers can choose to stick to the old regime, which has higher tax rates but more tax-saving options. The widening of options has also fueled the debate over the new tax regime vs old– which is better. No single rule applies to all. Individuals may have varying income levels, tax-saving investments, expenses, and financial goals.

So, if you are the one who is struggling to decide which is better new or old regime, this article is all you need. In this article, we’ve wrapped everything from both regimes’ features, benefits, and drawbacks. Also, we share some real-life cases to help you pick the best side in this conflict between the new tax regime vs old one.

How do you choose between the old and new tax regimes for salaried individuals?

To help you solve this riddle, it is essential to understand the detailed features of New Tax Regime vs Old.

FeaturesOld Tax RegimeNew Tax Regime
Tax Slab RatesUpto 2.5 Lacs Nil Rs. 2.5 Lacs – Rs. 5 Lacs 5% Rs. 5 Lacs – Rs. 10 Lacs 20%
Above Rs. 10 Lacs 30%
Up to Rs. 3 Lacs Nil Rs.
3 Lacs – Rs. 6 Lacs 5%
Rs. 6 Lacs – Rs. 9 Lacs 10%
Rs. 12 Lacs- Rs. 15 Lacs 20%
Above 15 Lacs 30%
Tax RebateUp to Rs. 5 Lacs under Section 87AUp to Rs. 7 Lacs under Section 87A
Standard DeductionRs. 50,000 for salary incomeRs. 50,000 for salary income and Rs. 15,000 or 1/3rd of pension, whichever is lower, for family pension
Surcharge37% for income over Rs. 5 Crores25% for income over 5 crores
Leave Encashment exemptionRs. 3 Lacs for non-government employeesRs. 25 Lacs for non-government employees
Deductions and ExemptionPlenty options available-
House Rent Allowance (HRA)
Deductions on savings bank interest u/s 80TTA/80TTB
Entertainment Tax and Professional tax Deduction (for government employees)
Rebate on Home Loan interest u/s 24 (for self-occupied or vacant property)
Tax-saving investments up to Rs. 1.5 Lacs u/s 80C
Medical insurance premiums up to Rs 25,000/- for individuals and Rs. 50,000/- for senior citizens.
Plenty options available-
House Rent Allowance (HRA)
Deductions on savings bank interest u/s 80TTA/80TTB
Entertainment Tax and Professional tax Deduction (for government employees)
Rebate on Home Loan interest u/s 24 (for self-occupied or vacant property)
Tax-saving investments up to Rs. 1.5 Lacs u/s 80C
Medical insurance premiums uptoRs 25,000/- for individuals and Rs. 50,000/- for senior citizens.
Default OptionApplicable until FY 2022-23Applicable from FY 2023-24

Old vs New Tax Regime: Which One is More Beneficial for You?

The difference between the old tax regime and the new one is not just about the tax rates but also the tax-saving opportunities. The old regime allowed various deductions and exemptions, such as HRA, LTA, Section 80C, Section 80D, etc., that could reduce taxable income and tax liability.

On the other hand, the new tax regime offers lower tax rates and limits deductions and exemptions to a few options, such as NPS contribution by employer, gratuity, etc.

The choice between a new tax regime or vs old one depends on various factors, such as income level, tax-saving investments, expenses, and financial goals. Some taxpayers may benefit from the simplicity and lower rates of the new regime, while others may prefer the flexibility and higher savings of the old regime.

To make an informed decision, taxpayers should compare the tax liability under both regimes and choose the one that suits their needs and preferences better.

The breakeven threshold for deciding between New vs Old tax regime

The breakeven point is the income level at which there is no difference in tax liability between the old tax regime vs new. The amount of deductions and exemptions that a taxpayer can claim under the old regime influences the choice of tax regime.

The old regime will benefit more if the eligible deductions and exemptions exceed the breakeven threshold for a given income level. However, if the deductions and exemptions are less than the breakeven point, the new regime will benefit more.

For example, the breakeven point for a 15-lakh income level is 3.75 lakhs. This means that if a taxpayer can claim more than 3.75 lakhs in deductions and exemptions under the old regime, they will pay less tax under the new regime. However, if the deductions and exemptions total less than 3.75 lakhs, the new regime will result in a lower tax liability.

Tax under Old vs New Regime

Suppose Mr X has a gross income of ₹15,00,000 in the financial year 2023-24. He also has the following deductions and exemptions:

-Standard deduction of ₹50,000 applicable to salary income

– Deduction of ₹1,50,000 under Section 80C for investments in PPF, ELSS, etc.

– Deduction of ₹50,000 under Section 80CCD(1B) for investment in NPS

– Deduction of ₹25,000 under Section 80D for health insurance premium

– Exemption of ₹1,00,000 for house rent allowance (HRA)

Let us compare his tax liability under the old and the new tax regimes:

ParticularsOld Tax RegimeNew Tax Regime
Gross IncomeRs. 15 LacsRs. 15 Lacs
Less Standard DeductionRs. 50,000Rs. 50,000
Less: Exemption under Chapter VI-ARs. 2.25 LacsNil
Less: Exemption u/s 10Rs. 1 LacsNil
Net Taxable IncomeRs. 11.25 LacsRs. 14.50 Lacs
Tax on Total Income up to. 3 lacsNilNil
Tax on income from 3,00,001 to Rs. 6 LacsRs. 15,000/-Rs. 15,000/-
Tax on income from Rs. 6,00,001 to Rs. 9 LacsRs. 60,000/-Rs. 30,000/-
Tax on income from Rs. 9,00,001 to Rs. 12 LacsRs. 90,000/-Rs. 45,000/-
Tax on income from Rs. 12,00,001 tto15 LacsRs. 90,000/-Rs. 60,000/-
Heath and Education cess @ 4%Rs. 10,200/-Rs.6,000/-
Total Tax PayableRs. 2,65,200/-Rs. 1,56,000/-

As we can see, Mr X will save ₹1,09,200 in taxes if he opts for the new tax regime. However, this may not be the case for everyone, as various factors, including income level, tax-saving investments, expenses, and financial goals, determine the chosen tax regime. As a result, taxpayers should compare their tax liability under both regimes and select the one that best suits their needs.

Conclusion

Choosing between the new tax regime vs old one is not a matter of flipping a coin. It involves checking and analyzing deeper aspects, such as income level, tax-saving investments, expenses, and financial goals.

When comparing the new tax regime vs old, the latter has higher tax rates and more options to save tax, which can lower the taxable income and promote saving habits. On the flip side, the new regime has lower tax rates and fewer options to save tax, making the tax calculation easier and benefiting those who do not avail of many tax benefits.

The government allows you to switch between tax regimes every year to adjust your choice between new and old tax regimes based on your changing income and expenses. You should weigh your tax liability under both regimes and choose the one that most closely fits your financial preferences and goals.

FAQs

  1. Can I switch between the old and the new tax regime every year?

    Yes, you can switch between the old and the new tax regime every year, depending on your income, deductions, and financial goals.

  2. What are the documents required to opt for the new tax regime?

    Submit a declaration form (Form 10-IE) to your employer or the income tax department to opt for the new tax regime.

  3. How do you choose between the old tax regime and the new regime?

    To make the perfect choice, you should compare your tax liability under both regimes and choose the one that suits them better. You can also seek help from a financial advisor or use any online tools available.

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I’m Archana R. Chettiar, an experienced content creator with
an affinity for writing on personal finance and other financial content. I
love to write on equity investing, retirement, managing money, and more.

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