Old vs New Tax Regime : Which is better

Introduction

The Indian government introduced a new tax regime in the Union Budget 2020-21, which offers taxpayers a choice between the old and new tax regimes. The old tax regime is the existing income tax system, while the new tax regime is a simplified version of the income tax system.

Here’s an overview of the differences between the old and new tax regimes:

1. Tax Rates: The new tax regime offers lower tax rates compared to the old tax regime. Under the new regime, there are fewer income tax slabs, and the rates are lower. For instance, in the old regime, the highest income tax rate is 39%, while in the new regime, it is 37%.

2. Deductions: The new tax regime does not offer several deductions that are available under the old tax regime. For example, deductions for medical insurance premiums, interest on housing loans, and professional taxes are not available under the new regime. However, some deductions like those for children’s education and health insurance premiums for self, spouse, and children are allowed under both regimes.

3. Exemptions: Some exemptions like leave travel allowance (LTA) and house rent allowance (HRA) are not available under the new tax regime. However, some exemptions like those for National Pension System (NPS), provident fund (PF), and gratuity are available under both regimes.

4. TDS: Under the new tax regime, TDS (Tax Deducted at Source) will be calculated based on the new tax rates. This means that TDS will be lower under the new regime compared to the old regime.

5. Overall Tax Liability: The overall tax liability for an individual may be higher under the new tax regime if they avail several deductions under the old regime. This is because some deductions are not available under the new regime, resulting in higher taxable income and higher taxes payable.

In summary, individuals with lower incomes and fewer deductions may benefit from switching to the new tax regime due to lower taxes payable. However, individuals with higher incomes and several deductions may find it beneficial to continue with the old tax regime due to higher overall deductions and lower taxes payable. It’s essential to evaluate your individual circumstances and consult a financial advisor before making a decision between the old and new tax regimes.

Deductions and Exemptions Under Old Tax Regime

Under the old tax regime, several deductions and exemptions are available to taxpayers. Here’s an overview of some of the most commonly availed deductions and exemptions:

1. Deduction for Medical Insurance Premiums: Under Section 80D, a deduction is allowed for the premium paid for health insurance policies for self, spouse, children, and parents. The maximum deduction allowed is Rs. 25,000 ($345) for self, spouse, and children and Rs. 30,000 ($414) for self, spouse, and parents or senior citizens (above 60 years).

2. Deduction for Preventive Health Check-ups: Under Section 80DDB, a deduction is allowed for expenses incurred on preventive health check-ups for self, spouse, children, and parents. The maximum deduction allowed is Rs. 5,000 ($68) per year.

3. Deduction for Interest on Housing Loans: Under Section 24(b), a deduction is allowed for the interest paid on housing loans taken to buy or construct a house property. The maximum deduction allowed is Rs. 2 lakhs ($27,154) per year.

4. Deduction for Professional Taxes: Under Section 16(i), a deduction is allowed for professional taxes paid by an individual during the financial year. The maximum deduction allowed is Rs. 250 ($3.46) per month or Rs. 3,000 ($414) per year.

5. Deduction for Donations: Under Section 80G, a deduction is allowed for donations made to certain funds or organizations approved by the government. The maximum deduction allowed is 50% of the donation amount for donations made to charitable institutions and 100% of the donation amount for donations made to certain funds like National Defence Fund (NDF) and Prime Minister’s National Relief Fund (PMNRF).

6. Exemption for Leave Travel Allowance (LTA): Under Section 10(5), an exemption is allowed for LTA received by an individual during the financial year from their employer. The maximum exemption allowed is Rs. 3 lakhs ($41,429) per year for self and family members traveling together.

7. Exemption for House Rent Allowance (HRA): Under Section 10(13A), an exemption is allowed for HRA received by an individual during the financial year from their employer as part of their salary package. The maximum exemption allowed is the least of the following: actual HRA received, 50% of basic salary if living in a metro city or 40% of basic salary if living in a non-metro city, and actual rent paid less 10% of basic salary.

Advantages of Opting For Old Tax Regime

While the new tax regime offers lower tax rates, it also does not offer certain deductions and exemptions that are available under the old tax regime. Here are some advantages of opting for the old tax regime:

1. Higher Deductions: The old tax regime allows for several deductions and exemptions that are not available under the new tax regime. For example, deductions for medical insurance premiums, interest on housing loans, and professional taxes are not available under the new regime. By availing these deductions under the old regime, an individual can reduce their taxable income and pay lower taxes.

2. Higher Exemptions: The old tax regime offers higher exemptions for certain items like LTA and HRA compared to the new regime. By availing these exemptions under the old regime, an individual can further reduce their taxable income and pay lower taxes.

3. Lower TDS: Under the new tax regime, TDS (Tax Deducted at Source) will be calculated based on the new tax rates. This means that TDS will be lower under the new regime compared to the old regime. By opting for the old tax regime, an individual may be able to avoid higher TDS deductions from their income sources like salary or interest income.

4. Flexibility: The old tax regime offers more flexibility in terms of choosing deductions and exemptions based on an individual’s specific circumstances. By availing a combination of deductions and exemptions under the old regime, an individual can further reduce their taxable income and pay lower taxes.

5. Higher Overall Deductions: Due to the availability of higher deductions and exemptions under the old tax regime, an individual may be able to avail higher overall deductions compared to the new tax regime. By availing higher overall deductions, an individual can further reduce their taxable income and pay lower taxes.

What Is the New Tax Regime?

The new tax regime, introduced in the Union Budget 2020-21, offers lower tax rates in exchange for fewer deductions and exemptions. Under this regime, an individual can choose to pay taxes based on a simpler and more straightforward tax structure.

Here are some key features of the new tax regime:

1. Lower Tax Rates: The new tax regime offers lower tax rates compared to the old tax regime. The tax rates under the new regime range from 5% to 30%, depending on the income bracket. These rates are lower than the corresponding rates under the old regime.

2. No Deductions: The new tax regime does not offer several popular deductions and exemptions that are available under the old tax regime. Some of these deductions include Section 80C (for investments in certain financial products), Section 80CCD (for contributions to retirement funds), and Section 80CCG (for investment in infrastructure bonds). By opting for the new regime, an individual may miss out on these popular deductions.

3. No Exemptions: The new tax regime does not offer several popular exemptions that are available under the old tax regime. Some of these exemptions include LTA (Leave Travel Allowance) and HRA (House Rent Allowance). By opting for the new regime, an individual may still have to pay taxes on a portion of their income due to these limitations.

4. No Rebate: Under the new tax regime, individuals with an annual income below Rs. 5 lakhs ($68,285) are not eligible for a rebate of Rs. 12,500 ($171). This rebate is available under the old tax regime for individuals with an annual income below Rs. 5 lakhs ($68,285). By opting for the new regime, an individual may miss out on this rebate if their income falls below this threshold.

5. Simpler Structure: The new tax regime offers a simpler structure with fewer deductions and exemptions, making it easier for individuals to calculate their taxes. By opting for the new regime, an individual may save time and resources spent on managing their taxes compared to the more complex structure offered by the old tax regime.

Advantages of Opting for the New Tax Regime

Some information about the advantages of opting for the new tax regime in India.

Some of the benefits of the new tax regime are:

You can choose the scheme that suits your income and expenses best. You have the option to switch between the old and new regimes every year, except if you have business income.
You can enjoy lower tax rates and a higher tax rebate limit. The new regime offers a full tax rebate on income up to 7 lakhs, whereas the old regime offers it only up to 5 lakhs. The new regime also has more tax slabs and reduced surcharge for high net worth individuals.
You can invest your money as per your preference and financial goals. The new regime does not require you to invest in specific tax-saving schemes and insurance plans, which may not align with your needs or expectations.
You can simplify your tax filing process and save time and effort. The new regime eliminates the need to keep track of various deductions and exemptions, such as HRA, LTA, 80C, 80D, etc. You can also claim the standard deduction of 50,000 and the family pension deduction under the new regime.

Income Tax Slab Rates for New Vs Old Tax Regime

The income tax slab rates for the new and old tax regimes in India are different for different categories of taxpayers. Here is a summary of the main differences:

The new tax regime offers lower tax rates and a higher tax rebate limit of ₹7 lakhs, but does not allow many deductions and exemptions, such as HRA, LTA, 80C, 80D, etc.
The old tax regime has higher tax rates and a lower tax rebate limit of 5 lakhs, but allows various deductions and exemptions, which can reduce the taxable income.
The new tax regime has more tax slabs and reduced surcharge for high net worth individuals, whereas the old tax regime has fewer tax slabs and higher surcharge for them.
The new tax regime has extended the standard deduction of 50,000 and the family pension deduction to all taxpayers, which were only available under the old regime.
The new tax regime has increased the leave encashment exemption limit for non-government employees from 3 lakhs to 25 lakhs.
The new tax regime is the default option for FY 2023-24, but taxpayers can switch between the regimes every year, except if they have business income.

Total Tax Payable as per New Regime (FY 23-24 & AY 24-25)

The total tax payable under the new tax regime for the financial year (FY) 2023-24 and the assessment year (AY) 2024-25 will depend on an individual’s income level and the tax slabs applicable for that year. Here’s a breakdown of the tax slabs under the new tax regime for FY 2023-24 and AY 2024-25:

1. Income up to Rs. 3 lakhs ($4,167): No tax is payable under this slab.

2. Income between Rs. 3 lakhs ($4,167) and Rs. 6 lakhs ($8,334): The tax rate is 5%.

3. Income between Rs. 6 lakhs ($8,334) and Rs. 9 lakhs ($12,501): The tax rate is 10%.

4. Income between Rs. 9 lakhs ($12,501) and Rs. 12 lakhs ($16,667): The tax rate is 15%.

5. Income between Rs. 12 lakhs ($16,667) and Rs. 15 lakhs ($20,833): The tax rate is 20%.

6. Income above Rs. 15 lakhs ($20,833): The tax rate is 30%.