With the Union Budget of 2020, the Government of India tried to simplify the existing tax structure by introducing a new tax regime. This new structure didn’t have many takers, so in the Budget 2023, the Government announced major changes to the new tax regime to encourage higher adoption by taxpayers. There are major differences between the old and the new tax regime, such as different tax slab rates and the treatment of deductions and exemptions. Before you opt for either, you must understand the intricacies to save as much of your money as possible.
The choice between the two structures can confuse the taxpayers about their income tax slabs and applicable deductions and exemptions. In this blog, we’re going to take a close look at the old vs new tax regime so you can make an informed decision regarding which structure can effectively minimise your tax liabilities.
New Tax Regime
The New Tax Regime was introduced by the government in the Union Budget 2020. In 2023, major changes were announced to the new tax slab of income tax so that more individuals are encouraged to adopt it. Here are some features of the new tax regime:
- The basic exemption limit is Rs. 3 lakh, meaning no income tax needs to be paid on the first three lakhs of your income. Before the changes, this limit was Rs 2.5 lakh under the new regime.
- Under Section 87A, the tax rebate used to be Rs. 5 lakh, which has been increased to Rs. 7 lakh from the financial year 2023-24.
- If someone’s income is above Rs. 7 lakh, the following tax slabs are applicable:
| Income | Tax Rate |
| Up to Rs. 3 lakh | None |
| Between Rs. 3 lakh and Rs. 6 lakh | 5% |
| Between Rs. 6 lakh and Rs. 9 lakh | 10% |
| Between Rs. 9 lakh and Rs. 12 lakh | 15% |
| Between Rs. 12 lakh and Rs. 15 lakh | 20% |
| Over Rs. 15 lakh | 30% |
- Remember that this tax system is progressive. Suppose someone earns Rs. 8 lakh a year. That doesn’t mean that a straight 10% tax of Rs. 8 lakh = Rs. 80,000 will be levied. The income will rather be divided into parts and then calculated. Here is a simple example –
- Tax on the first Rs. 3 lakh: 0
- Tax on the next Rs. 3 lakh: 5% of Rs. 3 lakh = Rs. 15,000
- Tax on the first Rs. 2 lakh: 10% of Rs. 2 lakh = Rs. 20,000.
- Thus, total tax on income of Rs. 8 lakh = Rs. 15,000 + Rs. 20,000 = Rs. 35,000.
(Note that this is a simple example without standard deduction or cess to showcase progressive taxation)
- The new tax regime allows salaried taxpayers to claim a standard deduction of Rs. 50,000.
- A standard deduction of Rs 15,000 can be claimed by individuals receiving a family pension.
- For HNIs (High-Net-Worth Individuals) the surcharge over Rs. 5 crore income has also seen a reduction from 37% to 25%.
- Previously, the exemption limit on leave encashment for non-government salaried individuals was Rs. 3 lakh. With the change in 2023, the limit was increased to Rs. 25 lakh.
- One of the most important aspects of the new tax regime is that it does not allow individuals to claim various exemptions and deductions such as the ones under Section 80C, 80D, 80E, 80G, and others of the Income Tax Act, and also other tax benefits such as House Rent Allowance (HRA) and Leave Travel Allowance (LTA). It is crucial to consider this factor before deciding between the new vs old tax regime.
- From FY 2023/24, the new tax regime was set as the default regime for taxpayers. If you don’t specifically inform your employer you are opting for the old regime, the TDS calculation on your salary will be done on the basis of the new regime.
Also Read: Key Advantages of Tax Planning
Old Tax Regime
The Old Tax Regime has higher tax rates compared to the new regime, but because of the many deductions and exemptions that can be claimed under this system, one can significantly reduce their tax liabilities. Here are some examples of the tax benefits under the old regime:
- Under Section 80C of the Income Tax Act, one can claim deductions of up to Rs. 1.5 lakh by investing in instruments such as the Public Provident Fund, Employee Provident Fund, Equity-Linked Savings Scheme, and Unit-Linked Insurance Plans.
- Benefits by investing in Post Office Schemes such as Sukanya Samriddhi Yojana, National Savings Certificate, and Senior Citizens Savings Scheme.
- Exemptions on Leave Travel Allowance and House Rent Allowance.
- Deductions on premiums paid towards life insurance.
- Benefits on for premiums paid towards one’s health insurance as well as premiums paid towards the health insurance of one’s parents under Section 80D.
- Benefits on repayments made towards a home loan.
- A standard deduction of Rs. 50,000 is allowed for salaried taxpayers, just like the new tax regime.
- Overall, the old tax regime offers over 70 deductions and exemptions.
Here are the income tax slabs for the old regime:
| Income | Tax Rate |
| Up to Rs. 2.5 lakh | None |
| Between Rs. 2.5 lakh and Rs. 5 lakh | 5% |
| Between Rs. 5 lakh and Rs. 10 lakh | 20% |
| Above Rs. 10 lakh | 30% |
A simple example of how tax is calculated under the old regime (without cess and standard deduction): Suppose an individual has a salary of Rs. 9 lakh.
- No tax on the first Rs. 2.5 lakh.
- Tax on the next Rs. 2.5 lakh, 5% of Rs. 2.5 lakh = Rs. 12,500
- Tax on the next Rs. 4 lakh, 20% of Rs. 4 lakh = Rs. 80,000.
- Total tax on income of Rs. 9 lakh = Rs. 12,500 + Rs. 80,000 = Rs. 92,500
If you are using this structure to file your taxes, remember to specify you’re opting for the old tax regime because the default between the old regime vs new regime is the new one. Before the due date, submit your income tax return along with Form 10-IEA.
Now that you know the basics of both tax structures, let’s compare the old vs new tax regime.
Also Read: Tips to Save Income Tax on Salary
Difference Between Old Vs New Tax Regime: Which is Better?
Let’s combine the income tax slabs to get a better understanding of new regime vs old regime calculation:
| Income | Old Tax Regime Rate | New Tax Regime Rate |
| Up to Rs. 2.5 lakh | None | None |
| Between Rs. 2.5 lakh and Rs. 3 lakh | 5% | None |
| Between Rs. 3 lakh and Rs. 5 lakh | 5% | 5% |
| Between Rs. 5 lakh and Rs. 6 lakh | 20% | 5% |
| Between Rs. 6 lakh and Rs. 7.5 lakh | 20% | 10% |
| Between Rs. 7.5 lakh and Rs. 9 lakh | 20% | 10% |
| Between Rs. 9 lakh and Rs. 10 lakh | 20% | 15% |
| Between Rs. 10 lakh and Rs. 12 lakh | 30% | 15% |
| Between Rs. 12 lakh and Rs. 15 lakh | 30% | 20% |
| Above Rs. 15 lakh | 30% | 30% |
Furthermore,
| Old Tax Regime | New Tax Regime |
| Tax rates are higher. | Tax rates are lower |
| Offers many exemptions and deductions that can significantly reduce tax liability. | Doesn’t offer as many deductions and exemptions compared to the old tax regime. |
| The tax filing process is a little complex. | Simplifies the tax filing process. |
So old regime vs new regime, which one is better? Well, as you can see both the regimes have their pros and cons. The better regime is of course whichever allows you to keep the most of your hard-earned money, which ultimately depends on your unique financial situation and investment and insurance strategy. Thus, the new tax regime vs old doesn’t have one specific answer. You can use tax calculators online to determine which of the two regimes will allow you to maximise your tax savings.
But let’s take another example: We will calculate the tax liability of a salaried individual with an annual income of Rs. 12 lakh under both tax regimes – old and new.
New Tax Regime Calculation:
A standard deduction of Rs. 50,000 will apply here, so the taxable income is Rs. 11,50,000.
- No tax on the first Rs. 3 lakh.
- Tax on the next Rs. 3 lakh: 5% of Rs. 3 lakh = Rs. 15,000
- Tax on the next Rs. 3 lakh: 10% of Rs. 3 lakh = Rs. 30,000.
- Tax on the next Rs. 2.5 lakh: 15% of Rs. 2.5 lakh = Rs. 37,500
- Total = Rs. 15,000 + Rs. 30,000 + Rs. 37,500 = Rs. 82,500.
- A cess of 4% is charged again: 4% of Rs. 82,500 = Rs. 3,300
- Total tax on income of Rs. 12 lakh = Rs. 15,000 + Rs. 30,000 + Rs. 37,500 + Rs. 3,300 = Rs. 85,800
Old Tax Regime Calculation:
A standard deduction of Rs. 50,000 will apply here as well, so the taxable income is again Rs. 11,50,000.
- No tax on the first Rs. 2.5 lakh.
- Tax on the next Rs. 2.5 lakh, 5% of Rs. 2.5 lakh = Rs. 12,500
- Tax on the next Rs. 5 lakh, 20% of Rs. 5 lakh = Rs. 1,00,000.
- Tax on the next Rs. 1.5 lakh, 30% of Rs. 1.5 lakh = Rs. 45,000
- Total = Rs. 12,500 + Rs. 1,00,000 + Rs. 45,000 = Rs. 1,57,500
- A cess of 4% is charged: 4% of Rs. 1,57,500 = Rs. 6,300
- Total tax on income of Rs. 12 lakh = Rs. 12,500 + Rs. 1,00,000 + Rs. 45,000 + Rs. 6,300 = Rs. 1,63,800
Finally, the total tax amount under the old regime is Rs. 1,63,800 and the amount under the new regime is Rs. 85,800. Of course, this is not taking into account the biggest advantage of the old regime – the deductions and exemptions.
Now suppose someone has invested Rs. 1.5 lakh in 80C investments, contributed Rs. 50,000 towards NPS, paid Rs. 40,000 on education loan interest and Rs. 50,000 on home loan interest, and donated Rs. 20,000 to charity. This will apply a Rs. 3,10,000 deduction under Chapter VI A. So calculating again under the old regime:
- Taxable income: Rs 12,00,000 – Rs. 50,000 (standard deduction) – Rs. 3,10,000 (Chapter VI A deduction) = Rs. 8,40,000
- No tax on the first Rs. 2.5 lakh.
- Tax on the next Rs. 2.5 lakh, 5% of Rs. 2.5 lakh = Rs. 12,500
- Tax on the next Rs. 3.4 lakh, 20% of Rs. 3.4 lakh = Rs. 68,000
- Total = Rs. 12,500 + Rs. 68,000 = Rs. 80,500
- Cess of 4% is charged: 4% of Rs. 80,500 = Rs. 3,220
- Total tax due: Rs. 80,500 + Rs. 3,220 = Rs. 83,720
Now the tax is lower than the new regime!
This is just an example. If your total deduction amount is less than Rs. 1.5 lakh, the new regime may be more suited to you. If you have maximised your deductions and they exceed Rs. 3.75 lakh, then the old regime may be more suited to you. Any deduction total between Rs. 1.5 lakh and Rs. 3.75 lakh, and your optimal regime will depend on how much your taxable income is.
Furthermore, if you want to file your taxes without any hassle, you can opt for the new tax regime as it doesn’t involve complex deductions and exemptions calculations. If you’ve heavily invested in tax-saving instruments and can claim a tax benefit equal to approximately Rs. 4.5 lakh or 40% of your annual income, whichever is lower, then choosing the old tax regime will provide better long-term benefits.
Exemptions under new tax regime
While the new tax regime doesn’t provide as many exemptions and deductions as the old tax regime, some benefits still apply:
- Standard deduction of Rs. 50,000 for salaried individuals.
- Standard deduction on rent is applicable.
- Exemption on income from life insurance and agricultural farming.
- Compensation on retrenchment.
- Exemption on leave encashment upon retiring.
- Up to Rs. 20 lakh gratuity received from the employer is exempt.
- Exemptions on employer contribution towards EPF and National Pension System (NPS).
- Exemption on money received as a scholarship.
- Interest earned and maturity on the Public Provident Fund and Sukanya Samriddhi Yojana are exempt.
- Voluntary Retirement Scheme (VRS) proceeds up to Rs. 5 lakh are exempt, and more.
New tax regime: Pros and cons
Here are some advantages and disadvantages of the new tax regime:
| Pros | Cons |
| Tax rates are lower. | Doesn’t allow taxpayers to claim as many deductions and exemptions as the old tax regime. |
| Makes tax calculation easier while reducing the burden of compliance. | Doesn’t encourage individuals to save and invest as much as the old regime. The deductions incentivise individuals to invest. |
| Allows individuals to explore different investment opportunities as they are not restricted by specific deductions. | Switching back to the new tax regime after opting out could prove challenging for individuals with business and professional income. Such individuals have a one-time choice. |
Conclusion
Deciding between the old regime and the new regime can be a tough choice. When you are making a decision, you shouldn’t just keep your taxable income in mind, but also the exemptions and deductions under the two structures that allow you to save as much of your money as possible. Because there are so many tax benefits given in the Income Tax Act, one can easily miss out on a few and not take full advantage of the opportunities available. That’s why it is important to consult a tax advisor before you file your taxes. A tax advisor calculates your tax liability on both old and new regimes and suggests the best route to take. Because paying taxes is a yearly obligation, the money a professional can help you save over decades is significant. Moreover, a tax advisor can keep you updated on the changes in tax laws and help you identify opportunities that can lead you to more tax benefits.
FAQs:
Which is better old tax regime or the new tax regime?
The choice between the old tax regime and the new tax regime depends on one’s unique financial circumstances. While you can get lower income tax rates by opting for the new tax regime, you will also have to forgo the exemptions and deductions in the old tax regime. Before you file your taxes, you can take advice from a tax planner to lower your tax liability as much as possible.
Which tax regime is better for 10 lakhs CTC?
Not counting standard deductions, if your total deductions are more than Rs. 2.6 lakh and you have invested heavily in tax saving schemes, then the old regime is more suitable. If you don’t have a lot of investment in tax-saving schemes and your total deductions are less than Rs. 2.6 lakh, then you can opt for the new regime.
What is the difference between the old and new tax regime 24?
The old tax regime is the old tax structure which allows taxpayers to claim a lot of deductions and exemptions given in the Income Tax Act. The new tax regime on the other hand was introduced in 2020 which allows taxpayers to pay tax at lower rates compared to the old structure. But if someone opts for the new regime, they also have to forgo deductions and exemptions given in Section 80C, 80D, and other benefits like HRA and LTA.
Is new tax regime better for salaried employees?
Whether or not the new tax regime is better for salaried employees depends on their financial situation. If a salaried employee has made investments in Section 80C exempt instruments like the National Pension Scheme, they will not get any tax benefits under the new regime but will under the old regime. If a salaried employee has made minimal investments in instruments that give benefits only under the old regime, they can opt for the new regime.
Can I switch between the old and new tax regime?
Yes, when you file your taxes every year, you have the option to choose between the old and new tax regimes. If you choose the new tax regime, you cannot claim the benefits under the old regime for that particular year. Next year you can switch to the old regime should you desire. People with business and professional income, however, can only switch once.
Are there any limitations to the new tax regime?
Yes, while the new tax regime offers lower income tax rates compared to the old regime, it also won’t allow you to claim various deductions and exemptions given under Sections 80C, 80D, 80E, 80G, and others of the Income Tax Act. Also, benefits such as House Rent Allowance (HRA) and leave travel allowance (LTA) are not applicable under the new tax regime, so it may limit your tax-saving opportunities.
Can I claim deductions under both the old and new tax regimes?
No, when you file your taxes each financial year, you have to pick one between the old and the new tax regimes.
