New Regime Vs Old Regime OF Income Tax

New Regime Vs Old Regime OF Income Tax

The Indian Income Tax system levies a tax on taxpayers depending on their income level. However, from Budget 2020, New Regime was launched and due to which method of levying taxes changed. 

For many people, it’s cumbersome to claim deductions, exemptions and maintain records. With the introduction of New Tax Regime, the government wants to ease all the compliance burden.

Optimize Your Tax Planning Strategy for New Regime vs Old Regime of Income Tax

In order to make effective tax planning, one should thoroughly go through both the regimes and decide the better one. 

One rule cannot be applied to everyone because everyone's eligibility for deductions, exemption and income level are different. 

Therefore, it becomes important for taxpayers to analyze and understand the tax payable/ refundable under both regimes, namely old and new regime before deciding which regime to choose.

Each regime has its own rules and effects that affect how much tax a person has to pay. 

Today, well look both the regimes and compare them. This will help taxpayers to understand their main differences, similarities, so they can make an informed choice.

Income Tax Slab under both regimes is mentioned below:-

Income Slab

Old Tax Regime

New Tax Regime (until 31st March 2023)

New Tax Regime (From 1st April 2023)

₹0 - ₹2,50,000

-

-

-

₹2,50,000  - ₹3,00,000

5%

5%

-

₹3,00,000 - ₹5,00,000

5%

5%

5%

₹5,00,000 - ₹6,00,000

20%

10%

5%

₹6,00,000 - ₹7,50,000

20%

10%

10%

₹7,50,000 - ₹9,00,000

20%

15%

10%

₹9,00,000 - ₹10,00,000

20%

15%

15%

₹10,00,000 - ₹12,00,000

30%

20%

15%

₹12,00,000 - ₹12,50,000

30%

20%

20%

₹12,50,000 - ₹15,00,000

30%

25%

20%

>₹15,00,000

30%

30%

30%

New Tax Regime:

Besides different tax slab, new system cannot provide various exemptions and deductions, including HRA, LTA, 80C, 80D, etc. 

As a result, the new tax structure found few supporters only. Therefore, the government announced five significant adjustments in Budget 2023 to persuade taxpayers to accept the new system. They are as follows:

  • Higher Limit on Tax Rebate: The limit for getting a full tax rebate has gone up from 5 lakhs to 7 lakhs. This means that people who make up to 7 lakhs won't have to pay any tax under the new system.
  • Simplified Tax Slabs: The tax exemption limit has been raised to 3 lakhs, and the new tax slabs have been changed to offer lower rates based on income levels.
  • Standard Deduction: Standard deduction of Rs 50,000/-, which was only available in the old tax system, is now available in the new system as well.
  • Family Pension: People who get a family pension can also claim a deduction of either 15,000 or 1/3 of the pension, whichever is less.
  • Surcharge: The surcharge rate for income over five crores has been cut from 37% to 25%. This change reduces their effective tax rate from 42.74% to 39%.
  • Higher exemption limit for leave encashment: The exemption limit for non-government employees on leave encashment has been raised from 3 lakhs to 25 lakhs.

Deductions allowed in the New Tax Regime-

  • Standard Deduction of Rs. 50,000 u/s 16(ia) to salaried individuals & pensioners
  • Deduction in respect of family pension u/s 57(iia), upto Rs. 15,000
  • Deduction in respect of contribution to Agniveer Corpus Fund under the newly inserted section 80CCH(2)
  • Deduction in respect of Employer’s Contribution to National Pension Scheme (NPS) u/s80CCD(2) to the extent of 10% of basic salary and dearness allowance in case of private sector employee & 14% in case of government employee
  • Transport allowance u/s 10(14) in case of a specially-abled person
  • Conveyance allowance u/s 10(14) received to meet the conveyance expenditure incurred as part of the employment
  • Daily allowance u/s 10(14) received to meet the ordinary regular charges or expenditure you incur on account of absence from his regular place of duty
  • Exemption on Voluntary Retirement 10(10C), Gratuity u/s 10(10) and Leave encashment u/s 10(10AA)
  • Interest on Home Loan on let-out property (Section24)
  • Deduction in respect of additional employee cost (Section80JJAA)

Old Tax Regime:

The old regime is the tax system that prevailed before the introduction of the new regime. 

Under this regime, there are 70 plus exemptions and deductions available, including HRA and LTA, that can reduce taxable income and lower tax payments.

Deductions allowed only under Old regime-

  • House Rent Allowance u/s10(13A)
  • Leave Travel Concession u/s10(5)
  • Interest on housing loan in respect of self occupied or vacant property, u/s24(b)
  • Helper Allowance u/s10(14)
  • Children Education Allowance
  • Chapter VIA Deductions u/s 80C like LIC, ULIPs, PPF; NPS Contribution u/s80CCD(1)/(1B)
  • Deduction in respect of Mediclaim Premium u/s 80D
  • Deduction in respect of Interest paid on education loan u/s 80E
  • Deduction in respect of Donation u/s 80G
  • Deduction in respect of Royalty income of Authors on Books u/s 80QQB
  • Deduction in respect of Interest Income on Savings Bank account u/s 80TTA
  • Deduction in respect of Interest Income on deposits with Post Office, Banks u/s 80TTB
  • Additional Depreciation u/s32(1)(iia)

Default Regime and Switching Options:

Through Budget 2023 Finance Minister Smt. Nirmala Sitharaman announced that the New Tax Regime is the default regime. 

Meaning thereby that the employer will deduct TDS on the basis of new regime and if any employee wants to continue under old regime, he needs to request his employer to do so.

Each year, taxpayers will be able to choose between the two tax systems. The ability to switch between the two regimes once a year gives taxpayers the freedom to change their tax planning strategies as their lives change, making sure that they are as tax-efficient as possible.

As taxpayers weigh the pros and cons of the old and new tax system, it is important to remember that tax planning should be in line with their long-term financial goals.

By staying informed, getting help from professionals, and making well-informed decisions, people can confidently navigate the tax system and minimise their tax liability.

Choosing Between the New Regime vs Old Regime of Income Tax

New tax regime vs old tax regime, which one is better??  It is a tough question to answer. 

We can decide the regime from the breakeven point. The Breakeven point is that amount where there will be no difference in tax liability under both the tax regimes, i.e. old regime and new regime.

If the total deductions and exemptions allowed under the old regime are more than the breakeven point, it is best to opt for the old regime. On the other hand, if the breakeven point is higher, it will be better to switch to the new tax regime.

Also Check,

What Is Income Tax? How to File an Income Tax Return?

Step-By-Step Guide For Filing Income Tax Returns For Past Year

Demystifying Income Tax Return Filing: Who is Required To File ITR?

On the other hand, one should calculate the tax liability as under-
Step 1 – Calculate all of the tax exemptions that can be claimed- If an individual is staying on rent, he will be claiming HRA (Home Rent Allowance), which is the largest salary exemption available. Other tax-free components like LTA (Leave Travel Allowance), Food Bills, Phone Bills, etc can be availed. If you opt to switch to the new tax regime, all of these “tax-free” will become “taxable”.

Step 2 – Calculate all the tax deductions that can be claimed- As a salaried employee, one will automatically receive two deductions:

  1. Standard deduction of Rs 50,000
  2. Your contribution to your Employee Provident Fund (EPF).

Even if you continue to contribute to EPF, you won't be able to collect these deductions under the new tax regime. Further, deductions for home loan (if you have one) or life insurance policies, or health insurance policies are not available.

Step 3 – Combine these tax exemptions and tax deductions and subtract them from your salary to get your taxable income.

Step 4 – Calculate taxable income if these deductions and/or exemptions were removed.

The results will help you decide which tax regime i.e Old tax regime or New tax regime is beneficial to opt.

FAQ’s Related to New Regime vs Old Regime of Income Tax

Q1: What is the difference between the old tax regime and the new tax regime?

A1: The old tax regime allows for various exemptions and deductions, such as HRA and LTA, while the new tax regime offers simplified tax slabs but eliminates many exemptions and deductions.

Q2: Can I switch between the old and new tax regimes?

A2: Yes, taxpayers have the option to switch between the two tax regimes once a year. The default regime is the new tax regime, but individuals can request their employer to continue under the old regime.

Q3: How should I choose between the old and new tax regimes?

A3: It is best to calculate your tax liability under both regimes and consider your deductions and exemptions. If the total deductions and exemptions are higher than the breakeven point, the old regime may be more beneficial. If the breakeven point is higher, switching to the new tax regime may be advantageous.

Q4: What factors should I consider when deciding on a tax regime?

A4: When making a decision, consider your eligibility for deductions and exemptions, your long-term financial goals, and consult with professionals if needed. Stay informed about the tax system to minimize your tax liability effectively.

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