Detailed Comparison Between New Tax Regime vs Old Tax Regime_Banner_WC

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Difference Between Old Vs New Tax Regime_WC

5 min 09 Aug 2023
Highlights:
  • Old Tax Regime
  • New Tax Regime
  • Old Tax Regime vs. New Tax Regime
  • Choosing Between Old Tax Regime and New Tax Regime

Your income levels establish the quantum of taxes payable each financial year at the time of filing the annual income tax returns. The Income Tax Act of 1961 contains provisions to reduce the Indian taxpayers’ tax liability through multiple deductions and exemptions. However, the new tax regime of 2020 alters the way taxes have been levied so far. It was introduced with the view to simplifying the system of taxation.  

The major differences between the old tax regime and the new one are in the income tax slab rates and the ability to secure concessions and rebates. Due to the widely varying nature of the taxation schemes, taxpayers should understand the differences between the old and new tax regimes, so they may opt for the right tax structure and plan their taxation accordingly.  

Understanding the Old Tax Regime 

The old tax regime allows taxpayers to enjoy a plethora of exemptions and deductions aimed at bringing down their taxable income. It exempts income up to Rs.2.5 Lakh, while the maximum rate applies on income above Rs.10 Lakh at 30%.  

Tax Rates Under the Old Tax Regime  

The old tax slabs remain unchanged sans revisions or modifications for FY 2023-24 as follows:  

Annual Income Range 

Old Regime Tax Rates 

Up to Rs.2.5 Lakh 

0

Rs.2.5 Lakh to Rs.5 Lakh 

5% (tax rebate under Section 87 A is applicable) 

Rs.5 Lakh to Rs.7.5 Lakh 

20% 

Rs.7.5 Lakh to Rs.10 Lakh 

20% 

Rs.10 Lakh to Rs.12.5 Lakh  

30% 

Rs.12.5 Lakh to Rs.15 Lakh  

30% 

Rs.15 Lakh and above 

30% 

 

Deductions and Exemptions Under the Old Tax Regime 

The old tax structure extends about 120 exemptions, the most commonly availed among them being:  

  • House Rent Allowance (HRA) 
  • Leave Travel Allowance (LTA) 
  • Deductions available under Section 80 TTA/TTB on interest incurred through savings account deposits 
  • Standard deduction of Rs. 50,000 for all salaried individuals 
  • Entertainment allowance and professional tax deduction in case of government employees
  • Deduction of Rs. 15,000 permitted from the family pension under Section 57 clause (iia)
  • Tax concession on Home Loan interest paid for a self-occupied or vacant property under Section 24
  • Rs. 50,000 for contribution to the National Pension System (NPS) under Section 80 CCD
  • Rebate in health insurance premium for self, spouse, children and parents under Section 80D
  • Exemption of income up to Rs. 1.5 lakh under Section 80C.

Deductions under Section 80 C can be received for the following instruments:  

  • Pension funds such as EPF, PPF 
  • ELSS, ULIP, tax-saving fixed deposits 
  • Saving schemes like National Savings Certificate, Sukanya Samriddhi Yojana, Senior Citizens’ Savings Scheme 
  • Life insurance premium 
  • Home Loan principal repayment 
  • Children’s tuition fees     

Advantages and Disadvantages of the Old Tax Regime 

The old tax regime accords the following benefits and disadvantages:  

Merits 

  • The old tax rules extend ample tax-saving deductions and exemptions thereby lowering the volume of payable taxes. These concessions also fetch zero liability taxes for certain income slabs 

  • In order to secure the benefits of the Income Tax Act provisions, the tax-saving guidelines result in significant savings through suitable financial instruments 

Demerits 

  • The old regime holds higher tax rates and involves more paperwork  

  • Funds need to be locked in for a specific duration in prescribed instruments for tax exemptions limiting investment opportunities for individuals  

Understanding the New Tax Regime 

The new regime is now the default tax system. If you wish to use the old tax regime, you will have to specifically select it. The revised rules are aimed at easing the taxation process and avoid any confusion that may arise from a multitude of provisions, which is why, it offers few exemptions to render tax compliance less tedious.  

Tax Rates Under the New Tax Regime 

The new regime comprises six tax slabs wherein the basic exemption limit has been raised from Rs. 2.5 lakh to Rs. 3 lakh. Furthermore, the tax rebate earned under Section 87A now applies to earnings up to Rs. 7 lakh, which was previously Rs. 5 lakh under the old regime. 

Income Slab 

Tax Rate 

Up to Rs.3 Lakh 

0

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% 

Above Rs.15 Lakh  

30% 

 

Calculation of Taxes Under the New Tax Regime 

The new system levies income tax in gradational slabs. This means, if you earn a salary of Rs. 10 lakh p.a., you will not be charged a flat 15% rate on your income as indicated in the table above. Instead, the tax will be calculated in stages such as: 

  • First, income up to Rs. 3 lakh will be considered which attracts no tax  
  • Next, the income between Rs. 3 lakh to Rs. 6 lakh will be charged 5%; so 5% of Rs. 3 lakh = Rs. 15,000  
  • Then, the income slab of Rs. 6 lakh to Rs. 9 lakh will be levied 10% tax, which comes to Rs. 30,000  
  • Now, the remaining Rs. 1 lakh of your income will incur a 15% tax rate of Rs. 15,000 
  • This will bring the total tax outgo to Rs. 60,000. 

Changes in Deductions and Exemptions Under the New Tax Regime 

Taxpayers opting for the new system may enjoy lower tax slabs but they cannot receive the exemptions and deductions extended by the old regime. Still, they may gain a few concessions like: 

  • Interest on savings accounts up to Rs. 3,500 under Section 10(15)(i)   
  • Income from agriculture 
  • Standard deduction on rent 
  • Retrenchment compensation 
  • Income from life insurance maturity under Section 10(10D) 
  • Scholarship money for education 
  • Death and retirement benefit 
  • Employer contribution to NPS, EPF up to 12% of salary; interest on EPF up to 9.5% p.a. 
  • Voluntary retirement scheme proceeds up to Rs. 5 lakh 
  • Gratuity up to Rs. 20 lakh 
  • Leave encashment on retirement 
  • Interest and maturity amount of PPF or Sukanya Samriddhi Yojana 
  • Commutation of pension 

Benefits and Demerits of the New Tax Regime 

Some of the advantages of the new tax regime are: 

  • The new plan provides concessional rates leaving them with more disposable income 
  • Fewer documentation requirements as one needs to forego additional tax deductions 
  • Taxpayers may opt for investments as per preference instead of picking options simply meant as tax-saving measures  
  • Tax calculation is much easier and quicker 

Some of the disadvantages of the new system include: 

  • It does not permit rebates which lower tax liability 
  • Taxpayers may not be inclined to save or invest extensively in ELSS, PPF etc. as there is no tax relief attached   

Comparison Between Old Tax Regime and New Tax Regime 

Working with the new scheme is hassle-free because taxpayers don’t need to worry about maintaining records of exemption limits. The new regime allows a standard deduction of Rs. 50,000 for all salaried persons and a deduction for family pension which may be Rs. 15,000 or 1/3rd of the pension. At the same time, those who stand to claim a higher amount of exemptions must continue with the old regime. 

Which Tax Regime is More Beneficial for Taxpayers? 

Both regimes grant certain benefits. It is difficult to choose one over the other without considering every facet of your income and tax-saving goals. Since the eligible deductions, sources and quantum of income differ for each person, one rule cannot apply to all. You will need to evaluate and compare tax liabilities under both regimes before taking a decision.  

Impact of the New Tax Regime on Different Income Groups 

The new system aims to reduce the taxation burden for all income groups by almost half. It may prove advantageous for individuals with an annual salary up to Rs. 7 lakh or those drawing higher salaries. 

To get an approximate overview, the regime change grants taxpayers in the Rs. 9 lakh p.a. income range payable taxes of Rs. 45,000 which is 5% of the salary. This is a reduction of Rs. 15,000 from the very recent Rs. 60,000 under the earlier slabs of the new regime. Similarly, an individual with Rs. 15 lakh income per year will have to pay a tax of Rs. 1.5 lakh which is a dip from the earlier Rs. 1.87 lakh. 

If your income is below Rs. 12 lakh, it is best to follow the old tax regime that will help you save more tax. But if your earnings exceed Rs. 12 lakh, the new regime will be beneficial because you will have a higher volume of disposable income.  

How to Choose Between the Old and New Tax Regimes 

If you are eligible to claim deductions or exemptions under the old tax regime towards HRA, LTA, PPF, etc. you may choose to stay with the existing tax scheme. Likewise, individuals who hold money in tax-saving instruments and other stipulated investments may maximise tax relief under the old regime. 

For example, housing loan borrowers repaying their EMIs can receive substantial Home Loan tax benefits. If you aspire to avail a Home Loan, you may secure tax relief on both the Home Loan interest and principal components. Therefore, it is vital to secure lower Home Loan interest rates from your lender to maintain a reasonable cost of credit. 

Factors to Consider While Choosing Between Old Tax Regime and New Tax Regime

You can choose a tax regime based on your income levels and investment portfolio. Here are the basic parameters taxpayers need to keep in mind:  

  • Your income level 
  • Investment goals for the present and the future 
  • Tax-saving potential 
  • Your tax liability under both regimes 
  • Future tax implications under both tax structures 

How to Compute Your Taxes Correctly

Calculating taxes entail considerable number crunching which may run the risk of errors. Hence, taxpayers can benefit greatly from the use of an income tax calculator. This tool enables you to compute the applicable deductions and exemptions, and then accurately calculate taxes payable for the current financial year. You may accordingly compute tax liabilities under both regimes to determine which accords bigger tax savings.   

Conclusion

Taxpayers need to opt for the old tax regime since the new regime is now the default option. So, take your pick between tax-saving deduction benefits of the old regime or a reduced tax slab under the new tax regime after carefully exploring the possible implications on your taxes payable for the year. 

Frequently Asked Questions (FAQs):_WC

Frequently Asked Questions (FAQs)

The new tax regime introduced in Budget 2020 witnessed altered tax slabs whereby taxpayers benefit from lower tax rates. However, those who opt for the new regime cannot claim exemptions and deductions such as HRA, LTA, Section 80C, 80D and other rebates.

Some of the key differences between both regimes are tabulated below:

Old Tax Regime New Tax Regime
Few income slabs available; limited to four slabs More tax slabs; six slabs are offered
Higher tax rates Lower tax rates (less by almost half)
Various deductions lower the tax liability A large number of deductions and exemptions cannot be availed
Zero tax for income up to Rs. 2.5 lakh Zero income tax for earnings up to Rs. 3 lakh

Income tax is not levied as a flat rate. To take an example, if you earn a salary of Rs. 10 lakh, the tax will be calculated in stages. Your income up to Rs. 3 lakh will incur no tax, while the income between Rs. 3 lakh to Rs. 6 lakh will be levied 5% tax, so 5% of Rs. 3 lakh = Rs. 15,000. Next, the income slab of Rs. 6 lakh to Rs. 9 lakh at 10% tax will come to Rs. 30,000. Now, the remaining Rs. 1 lakh of your income will attract 15% tax rate of Rs. 15,000. This will take your net payable tax to Rs. 60,000.

If you do not qualify for the old regime deductions, you may find the new tax regime more beneficial due to smaller tax rates. Moreover, the calculation method is much simpler, easing the tax filing process.

As per the income tax laws, taxpayers with business income cannot switch between the old and new regimes every year. However, salaried individuals and pensioners are eligible to switch regimes annually as per convenience.

The following deductions and exemptions are not extended under the new tax regime:

  • House Rent Allowance (HRA)
  • Leave Travel Allowance (LTA)
  • Deductions available under Section 80 TTA/TTB on interest incurred through savings account deposits
  • Entertainment allowance and professional tax deduction in case of government employees
  • Tax concession on home loan interest paid for a self-occupied or vacant property under Section 24
  • Rebate in health insurance premium for self, spouse, children and parents under Section 80D
  • Exemption of income up to Rs. 1.5 lakh under Section 80 C such as pension funds (EPF, PPF), ELSS, ULIP, tax saving fixed deposits, home loan principal repayment, children’s tuition fees, etc.

Under the new tax regime, the basic exemption limit remains the same for everyone, including senior citizens. There are no tax rebates for senior and super-senior citizens.

Age Group New Regime Exemption Limit (AY 2024-25) New Regime Exemption Cap (up to AY 2023-24) Old Regime Exemption Ceiling
Below 60 years old Rs. 3 lakh Rs. 2.5 lakh Rs. 3 lakh
Above 80 years old Rs. 3 lakh Rs. 2.5 lakh Rs. 5 lakh

If you have been claiming relief on your tax-saving instruments, you may keep doing so by opting for the old tax regime. But if you are unable to claim reasonable benefits through these investments, filing returns under the new regime may offer a better alternative.

Taxpayers can access Form 10E online through the income tax department portal to file tax returns under the new tax regime. The form may be filed using either a digital signature or through electronic verification code. The exact procedure is yet to be notified.

The new regime lets you alternate and switch regimes every financial year. However, the new tax regime is your default option. Thus, unless specified otherwise, employers will deduct taxes on your salary based on the new structure.

No. You cannot claim all the deductions and exemptions under both the old and new tax regimes. Most concessions are disallowed under the new regime, while some are still retained.

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