Your income bracket establishes the amount of taxes payable each financial year at the time of filing the annual income tax returns. The Income Tax Act, 1961 contains provisions to reduce the Indian taxpayers’ tax liability through multiple deductions and exemptions. To simplify the taxation system in India, a new tax regime was introduced in the year 2020.
The major differences between the old and the new tax regime are in the income tax slab rates and the ability to secure concessions and rebates. 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 several exemptions and deductions aimed at reducing their taxable income. It exempts income up to Rs.2.5 Lakh, while the maximum rate applies on income above Rs.15 Lakh at 30%.
Tax Rates Under the Old Tax Regime
The old tax slabs remain unchanged for FY 2024-25 as follows:
Annual Income Range | Old Regime Tax Rates |
---|---|
Up to Rs.2.5 Lakh | NIL |
Rs.2.5 Lakh to Rs.5 Lakh | 5% (tax rebate under Section 87A is applicable) |
Rs.5 Lakh to Rs.10 Lakh | 20% |
Above Rs.10 Lakh | 30% |
Deductions and Exemptions Under the Old Tax Regime
The old tax structure extends the following exemptions:
- House Rent Allowance (HRA)
- Leave Travel Allowance (LTA)
- Deductions available under Section 80TTA/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(b)
- 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 80C can be received for the following instruments:
- Pension funds such as EPF and PPF
- ELSS, ULIP, and tax-saving fixed deposits
- Saving schemes like the 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 advantages and disadvantages:
Advantages
-
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
Disadvantages
-
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. However, you can still opt for the old tax regime. The revised rules are aimed at easing the taxation process and avoiding 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.7 Lakh | 5% |
Rs.7 Lakh to Rs.10 Lakh | 10% |
Rs.10 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 that 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 and 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
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?
The choice between tax regimes depends on the taxpayer's investment decisions, tax-saving strategies, and financial objectives. Those with substantial deductions and tax-saving investments may prefer the old tax regime, while individuals with fewer deductions might benefit more from the new regime's rates. It is advisable to use an income tax calculator before making a decision.
Impact of the New Tax Regime on Different Income Groups
The new system aims to reduce the taxation obligation 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. If your income is below Rs.12 Lakh, opting for the old tax regime can 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 entails considerable number crunching which may run the risk of errors. Hence, taxpayers can benefit from the use of an income tax calculator. This tool enables you to compute Home Loan tax benefits accurately.
Conclusion
Taxpayers can opt for the old or new tax regime. However, it is important to understand the exemptions available under both regimes. After carefully exploring the possible implications on your taxes payable for the year, you can choose the regime that meets your financial goals.
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:
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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