Since the introduction of the revised income tax regime in 2020, taxpayers have faced a crucial question: Should they continue with the old deduction-heavy tax regime or switch to the streamlined new one? In this article, we explore the key differences, changes introduced in Budget 2023, and provide insights to help you make the best choice.
Starting from 1st April 2020, individual taxpayers and Hindu Undivided Families (HUFs) in India were given the option to choose between two tax structures: the traditional old regime with its deductions or the new, simplified tax regime. The 2023 Union Budget declared the new tax regime as the default option, but taxpayers can still opt for the old regime if preferred. So, which option is better?
The answer largely depends on your tax situation, such as whether you’re salaried or self-employed, the exemptions and deductions you’re eligible for, and how your savings and investments align with the two systems.
Old Tax Regime vs New Tax Regime: Key Differences
The Old Tax Regime The old tax system is rich in deductions, offering over 70 exemptions and deductions. It benefits individuals who make significant investments in tax-saving schemes.
Key deductions in the old tax regime include:
- Section 80C: Up to ₹1.5 lakh for investments in ELSS, PPF, NPS, etc.
- Section 80D: Deductions on health insurance premiums.
- HRA and LTA: Exemptions for house rent and leave travel allowances.
- Home loan interest: Up to ₹2 lakh under Section 24(b).
However, this regime requires meticulous tax planning and extensive documentation.
The New Tax Regime Launched in FY 2020-21 under Section 115BAC of the Income Tax Act, the new regime simplifies tax by lowering the tax rates and eliminating most exemptions and deductions. It’s designed for taxpayers who prefer a more straightforward approach to taxation.
Changes introduced in Budget 2023 for the new tax regime include:
- Revised tax slabs (FY 2024-25):
- Up to ₹3 lakh: No tax
- ₹3 lakh – ₹6 lakh: 5%
- ₹6 lakh – ₹9 lakh: 10%
- ₹9 lakh – ₹12 lakh: 15%
- ₹12 lakh – ₹15 lakh: 20%
- Above ₹15 lakh: 30%
- Tax Rebate: The tax-free income threshold is now raised to ₹7 lakh (from ₹5 lakh) under Section 87A.
- Standard Deduction: Salaried individuals can now claim ₹50,000 as a standard deduction, increasing the tax-free income to ₹7.5 lakh.
- Reduced Surcharge for High-Income Earners: The surcharge on income over ₹5 crore has been reduced from 37% to 25%, lowering the effective tax rate.
Comparative Analysis: Old Tax Regime vs New Tax Regime
Here’s a breakdown of how the two regimes compare at different income levels:
Income Level | Tax Savings in Old Regime (with deductions) | Tax in New Regime (Post Budget 2023) |
---|---|---|
₹7 lakh | Zero tax (with full Section 80C utilisation) | Zero tax (due to revised rebate) |
₹10 lakh | ₹54,600 (with ₹2.5 lakh deductions) | ₹54,000 |
₹15 lakh | ₹1,95,000 (with ₹4 lakh deductions) | ₹1,50,000 |
For taxpayers claiming deductions under ₹1.5 lakh, the new regime might offer more benefits. However, for those with significant investments and deductions exceeding ₹3.75 lakh, the old regime could prove to be more advantageous.
Which Tax Regime is Best for You?
New Tax Regime: The new tax system is ideal for individuals with limited investments, non-salaried taxpayers, or those who prefer a simpler tax filing process with fewer compliance requirements.
Old Tax Regime: The old system is better for salaried taxpayers and individuals with substantial investments and savings. It’s best for those who can fully leverage deductions like Section 80C, HRA, and home loan interest.
Budget 2023 Enhancements for the New Regime To make the new regime more attractive, the Indian government introduced several improvements:
- Higher Tax-Free Threshold: Income up to ₹7.5 lakh is now tax-free, thanks to the ₹50,000 standard deduction.
- Leave Encashment Exemption: Non-government employees can now claim up to ₹25 lakh as leave encashment on retirement (previously ₹3 lakh).
- Simplified Tax Slabs: With fewer tax brackets and lower rates, the new regime is easier to navigate.
Ultimately, the choice between the old and new tax regimes depends on your financial situation. If your total deductions exceed ₹3.75 lakh, the old regime may be the better choice. However, if simplicity, fewer compliance obligations, and a more straightforward tax filing process are priorities, the new regime is likely more suited to your needs.
Taxpayers should carefully evaluate their income, deductions, and investment strategy before making a decision. Using online tax calculators and consulting with a tax advisor will ensure a more informed choice.