Old Vs New Tax Regime: Which is Better?

Old Vs New Tax Regime: Which is Better?

In 2020-21, the Indian income tax system underwent a significant change with the introduction of a new tax regime. This fresh approach brought down tax rates but also reduced opportunities for tax savings. To bolster this shift, the government introduced incentives in the 2023 Budget.

Determining which regime is better, the old or the new, largely depends on your income level. Let’s delve into the variances between the two and examine their effects on different income groups.

This blog will delve into the differences in tax rates and deductions between the old and new regimes. Moreover, we’ll provide examples to demonstrate how the new regime impacts taxpayers across various income brackets.

When it comes to filing taxes, the decision between the old and new tax regimes can significantly impact your financial situation. Here’s a brief comparison to help you make the right choice:

Old Tax Regime:

The old tax regime, which was in place before the new system was introduced, provided various exclusions and deductions, approximately 70 in total. These deductions, such as those for House Rent Allowance (HRA) and Leave Travel Allowance (LTA), could help lower taxable income and reduce tax payments.

Section 80C was a significant deduction under this regime, allowing individuals to reduce taxable income by up to Rs. 1.5 lakh. Additionally, taxpayers had the flexibility to choose between the old and new tax regimes.

List of Exemptions and Deductions Available in the Old Tax Regime

Below is a paraphrased version of the list of exemptions and deductions available in the old tax regime:

1. Leave Travel Allowance (LTA)
2. House Rent Allowance (HRA)
3. Salaried individuals could avail a standard deduction of Rs. 50,000.
4. Deductions for interest earned on savings account deposits under Section 80TTA/80TTB.
5. Government employees were eligible for deductions related to entertainment allowance and professional tax.
6. Tax relief on interest paid on home loans for self-occupied or vacant properties under Section 24.
7. A deduction of Rs. 15,000 allowed from family pension under specified clauses of Section 57.
8. Tax-saving investment deductions under Chapter VI-A, including options like ELSS, NPS, PPF, and insurance premiums.
9. Deduction for employer’s contribution to NPS under Section 80CCD(2) and for new employment under Section 80JJAA.

It’s important to note that exceeding Rs. 7.5 lakh in contributions to EPF and NPS in a financial year could result in tax liability.

New Tax Regime

Beginning April 1, 2020 (FY 2020-21), the Indian Government introduced a new optional tax system for individuals and Hindu undivided families (HUF).

This change involved adding Section 115 BAC to the Income Tax Act of 1961, which offered reduced tax rates for taxpayers and HUFs who chose not to avail certain tax deductions or exemptions.

Following recommendations from the Union Budget 2023, the new tax regime became the default option, requiring taxpayers to actively select the old tax regime if they preferred it.

However, those opting for the new system forfeited various exemptions and deductions like HRA, LTA, 80C, 80D, etc. This lack of deductions made the new tax structure less appealing. To encourage acceptance, the government introduced five significant adjustments in Budget 2023. They are as follows:

• Increased Tax Rebate Limit

A new tax rebate of up to 7 lakhs has been introduced. In the old tax system, this rebate was only up to five lakhs. What this means is that individuals earning up to Rs 7 lakh won’t have to pay any tax under the new system!

• Simplified Tax Slabs

The new tax exemption limit has been increased to 3 lakhs. Here are the updated tax brackets for the new and old tax systems:

Standard Deduction and Family Pension Deduction

Salary Income: The standard deduction of Rs 50,000, previously available only in the old tax system, is now extended to the new tax scheme. When combined with the rebate, this means individuals can earn up to 7.5 lakhs without paying any tax under the new system.

Family Pension: For those receiving a family pension, they can claim a deduction of either ₹15,000 or 1/3rd of the pension, whichever is lower.

Surcharge for High-Net-Worth Individuals Cut: The surcharge rate for individuals with high net worth has been reduced. For incomes over five crores, the surcharge has decreased from 37% to 25%, resulting in their effective tax rate dropping from 42.74% to 39%.

Higher Leave Encashment Exemption: Furthermore, the exemption limit for non-government employees has been significantly increased from 3 lakhs to 25 lakhs.

Key Exemptions in the New Tax Regime

Here’s a simplified version of the various sources of income and benefits:

1. Income from Life Insurance
2. Agricultural Income
3. Standard deduction on rent
4. Compensation for retrenchment
5. Payment for unused leave upon retirement
6. Voluntary Retirement Scheme (VRS) proceeds up to Rs. 5 lakhs
7. Benefits received upon retirement or death
8. Scholarships received for education, and similar sources of income.

Difference Between Old Vs New Tax Regime: Which should a person choose?

Deciding between the new and old tax regimes is challenging because there’s no clear-cut answer.

Whether you should switch to the new tax system or stick with the old one depends on the tax deductions and exemptions you can avail of in the previous tax system.

Old Vs New Tax Regime Example

Let’s say someone earns Rs. 8,00,000. Here’s how their taxes would be calculated under the new and old tax systems:

Comparison of Estimates: Old Tax System versus New Tax System

Here are some points to consider when deciding between the existing and new tax regimes:

1. If your total deductions are less than 1.5 lakhs, the new regime might be better for you.
2. The old regime becomes more advantageous when your total deductions exceed 3.75 lakhs.
3. If your total deductions fall between 1.5 lakhs and 3.75 lakhs, the choice depends on your income level.

Comparing the Old Tax System to the New Tax System

To sum it up, the new tax regime is suitable for those who don’t want many deductions or find tax preparation burdensome. This includes non-salaried individuals and older individuals without pension income, who don’t benefit from certain deductions available in the old system.

On the other hand, senior citizens who earn significant interest income benefit from deductions available in the old regime, such as the INR 50,000 deduction under Section 80TTB.

Both regimes have their pros and cons. The old system encourages saving habits, while the new system is simpler and reduces the potential for tax evasion. However, since everyone’s financial situation is different, it’s essential to compare both regimes to determine which one suits you best.

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