Old Vs New Income Tax Regime Things You Need To Know

Old Vs New Income Tax Regime Things You Need To Know

The old income tax regime offers more deductions and benefits, while the new regime simplifies tax structure with lower rates but fewer deductions.

Written by : Shipra Chaudhary

Reviewed by : Akanksha Gangvany

Akanksha Gangvany

2020-07-20

618 Views

7 minutes read

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Budget 2020 introduced a new personal income tax regime for individual taxpayers with lower tax rates but more tax slabs. Also, it removed all available deductions and exemptions. The Finance Minister gave taxpayers an option to choose between the new regime and the old one, which, in fact, made the whole process seem complex. 

In the 2023 Budget, Finance Minister Nirmala Sitharaman implemented significant updates to the New Tax Regime, establishing it as the default choice for tax calculations. This shift implies that salaried individuals will have their taxes automatically computed under the new regime unless they specifically opt for an alternative approach.

Thus, understanding income tax is extremely crucial, but can often be overwhelming for taxpayers, and a lot of factors can even make it confusing. For instance, several people end up calculating the wrong value by deducting the allowable deductions from total tax liability instead of their Gross Total Income. 

This article intends to explain the older tax system and compare it with the new regime in the most layman manner possible.

Table of Content

What is Old Tax Regime and Its Advantages?

India's gross savings rate was approximately 30% in March 2019, and domestic savings significantly contributed to the overall rate. This was because the old income tax regime helped promote savings for any future eventuality like marriage, education, purchase of house property, medical exigency, etc., by enforcing investments in specified tax-saving instruments like ULIPs, which over a period inculcated the savings culture in individuals. So, if more individuals will opt for the new regime, the savings rate will decrease. Nevertheless, the consumption cycle and demand would be revived.

It is the best tax regime option for those who invest in tax-saving instruments. Here are some of the key advantages of this old tax regime:

  • Under the old tax regime, the basic tax exemption limit is ₹2.5 lakh. So, if an individual’s income lies within this limit, they will not be obliged to pay the tax.
  • If the income does not exceed ₹5 lakh, then the individual can avail a tax rebate of up to ₹12,500. This means that under the old tax regime, they may end up paying zero tax if their income is up to ₹5 lakh.
  • Taxpayers can claim deductions under various sections, such as Section 80C, 80D, 80E, 80EE, 80U, 80G, 80TTA, etc., which reduce their taxable income and thereby lower their overall tax liability.

What is New Tax Regime and Its Advantages?

The new tax regime, with concessional tax rates, was introduced in Budget 2020. Also, as most of the exemptions and deductions are not available, tax filing becomes simpler as less documentation is required. Moreover, the reduced tax rate provides more disposable income to people who could not invest in specified instruments due to certain financial or personal reasons. Therefore, offering increased liquidity in the hands of the taxpayers and allowing the flexibility of customising the investment choice.

Under the new regime, all taxpayers would be treated at par because the benefits of new tax regime deduction/allowance does affect tax liability. This can be especially helpful for taxpayers who may not subscribe to the specified modes of investments, as most of these investments have a lock-in period. They can instead invest in open-ended instruments, which provide them good returns as well as the flexibility of quicker withdrawal.

However, taxpayers who chose the new tax regime could not avail themselves of significant deductions such as HRA, LTA, 80C, etc. As a result, fewer taxpayers opted for this regime. Thus, the government introduced five key changes in the Budget 2023 to encourage taxpayers to adopt the new regime, which remains unchanged for FY 2024-2025.

Here are the key changes introduced in Budget 2023 to make the new tax regime more attractive:

  • A new tax regime is set as the default; TDS is calculated based on the new regime if it is not specified by the taxpayer from FY 23-24.
  • The basic exemption limit under this tax regime was raised to ₹3 lakh. Also, the highest tax rate of 30% applies above ₹15 lakh income.
  • Section 87A rebate increased to ₹7 lakh, providing a maximum rebate of ₹25,000 for incomes up to ₹7 lakh from FY 23-24.
  • From FY 23-24 onwards, individuals earning a salary can avail of a standard deduction of ₹50,000 from their gross salary income. Family pensioners who choose the new regime benefits can claim a standard deduction of ₹15,000 from their pension income.
  • The surcharge on annual incomes exceeding ₹5crores has been slashed from 37% to 25% under the new regime. This adjustment lowers the highest tax rate to 42.74%, ultimately reducing the maximum tax rate to 39%.
  • Non-government salaried employees now enjoy the benefit of new tax regime from an increased tax exemption limit on leave encashment, raised significantly from ₹3 lakh to ₹25 lakh.
  • One of the best new tax regime benefits is it simplifies the structure by reducing the number of income tax slabs from 6 to 5, streamlining the tax assessment process.

Did you know?

Individuals have the flexibility to choose between the old and new tax regimes every financial year based on their financial situation and tax planning needs.

Source: Money Control

Claim Settlement Ratio

Which Tax Regime is better? New Regime vs Old Regime

For income segments up to ₹15 lakh, the New Tax Regime has proposed lower income-tax rates but only at the cost of taxpayers giving up exemptions and deductions available under various provisions of the Income Tax Act. This means they will have to let go of some exemptions, including Leave Travel Allowance (LTA), House Rent Allowance (HRA), and deductions available, including Insurance Premium payout and Savings Account Interest under Chapter VI A of the IT Act Section 80 such as 80C, 80CCC, 80CCD, 80D, 80DD, 80E, 80EE, 80G, 80GG, 80GGA, 80GGC, etc.

Even the standard deduction of ₹50,000 under Section 16 is available to salaried individuals, and the deduction on home loan interest, under Section 24(b), will not be allowed. However, the deduction under Section 80CCD (2), which is the employer’s contribution on account of an employee in a notified pension scheme, and Section 80JJAA for new employment, can be claimed.

One should deeply understand both sides before choosing the regime that is most beneficial for them. The older regime will work in the interest of taxpayers' financial well-being if they are looking to fulfil their financial goals like wealth creation through investments in tax-saving instruments, paying premiums to meet health and life insurance needs, paying children’s school fees, buying a house with a home loan, etc. On the inverse, the new regime will do well for someone who does not intend to invest major amounts in tax-saving plans. Opting for the new tax regime streamlines documentation by eliminating the complexities of calculating and claiming deductions and exemptions. This simplification accelerates the filing of Income Tax Returns (ITR).

Glossary

  • Tax Rebate: A reduction in tax liability directly applied to the total tax payable, often based on income thresholds or specific conditions like Section 87A, which offers rebates up to a specific limit.
  • Surcharge: An additional tax levied on top of the regular income tax for high-income earners. It is typically applied progressively based on income brackets.
  • Leave Encashment Exemption: A provision that allows non-government salaried employees to exclude a portion of their leave encashment amount from taxable income up to a specified limit.
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FAQs Related to Old vs New Income Tax Regime

The decision between the old and new tax regimes depends on individual financial circumstances and goals. The old regime offers more deductions and exemptions, suitable for those with significant investments or loans. In contrast, the new regime provides lower tax rates and simplicity, benefiting those looking for streamlined tax filing and who don't heavily rely on deductions. 

For an income of ₹12 lakhs, the new tax regime might be more advantageous due to its lower tax rates and simplified structure. This results in lower tax liability than the old regime, which had deductions. 

In the new tax regime, you cannot claim House Rent Allowance (HRA) deductions, as it eliminates most deductions and exemptions in favour of lower tax rates.

In the new tax regime, deductions under Section 80C (such as investments in PPF, EPF, ELSS, etc.) are not allowed. The government aims to simplify taxes by offering lower tax rates but without the benefit of traditional deductions.

No, PPF (Public Provident Fund) contributions are not exempted in the new tax regime.

In the new tax regime, deductions such as those under Section 80C (PPF, ELSS, etc.), Section 80D (health insurance premiums), Section 24 (home loan interest), and other commonly claimed deductions are not allowed. This regime prioritises lower tax rates over deductions for simplicity and fairness.