New Tax Regime vs Old Tax Regime- Which Is Better To Opt
Many taxpayers are faced with a difficult decision when deciding between the new tax regime and the old tax regime. To assist you in making an informed choice, let’s examine the salient features of each regime. There is so many questions like How To Choose Between Old and New Tax Regimes? or How to opt for an old or new tax system?
We explained here, some important criteria, which will definitely helpful to you to decide which regime is better to opt out. Like; Comparison of exemptions & deductions allowed in both tax regimes with tax calculator, Tax saving options for salaried persons and some FAQs for tax savings on salary under the old tax regime vs the new tax regime.
Note: Before selection of the default option, tax payer must advisable to login the income tax portal and compare tax liability in both tax systems with the help of Income tax calculator.
What are the new regime and the old regime with few examples?
A. What is the New Tax Regime?
With the intention of providing concessional tax rates and streamlining the new income tax regime, the new tax regime was unveiled in Budget 2020. Nevertheless, taxpayers who choose this regime are unable to deduct significant expenses like Section 80C, Leave Travel Allowance, and House Rent Allowance (HRA).
As a result, fewer taxpayers initially opted for the new tax system. One can use the tax calculator’s new regime for proper calculations.
Income Range & New Tax Slab:
Here are the new tax regime slabs:
- Up to ₹3,00,000 (Nil)
- ₹3,00,001 – ₹6,00,000 – 5%
- ₹6,00,001 – ₹9,00,000 – 10%
- ₹9,00,001 – ₹12,00,000 – 15%
- ₹12,00,001 – ₹15,00,000 – 20%
- Above ₹15,00,001 – 30%
Here are few examples of tax calculation under the new regime:
Example-1: If salary income is Rs 7,50,000 lacs, then Tax payable will come to Rs. NIL as per the above slab under the new regime after the benefit of standard deduction Rs. 50,000 & rebate u/s 87A.
Example 2: If the salary income is Rs 10,00,000, then the tax payable will come to Rs 54,600 (including education cess) as per the above slab under the new regime.
Calculation as Under:
Out of Rs 10,00,000, the first Rs. 50,000 is allowed as the standard deduction; on the next Rs 3,00,000, the tax will be NIL; on the next Rs 3,00,000, Tax @5%, i.e. Rs. 15,000, on the next Rs 3,00,000, tax @10%, i.e. Rs.30,000 & on balance Rs 50,000 @15%, the tax will be Rs. 7,500. Hence, the total Tax will be Rs. 52,500 (Rs. 15,000+Rs. 30,000+Rs. 7,500) and a 4% education cess of Rs. 2,100 on Rs 52,500, then the total tax payable will be Rs 54600/- on the Income of Rs. 10,00,000 finally.
Several adjustments were made in Budget 2023 to make it more appealing:
Default Income Tax Regime:
As of right now, the new tax structure is in place. If you do not notify your employer of your preference, starting in FY 23–24 (normally in April month), Tax Deducted at Source (TDS) will be computed using the new Tax by default.
Tax Rate Adjustments:
NIL rate applicable on ₹2.5 lahks to ₹3 lahks is now, and for taxable Income over ₹15 lahks, the highest tax rate of 30% is appropriate.
Rebate Limit Increase:
If Income does not surpass ₹7 lacks, the rebate u/s 87A has been raised from ₹5 lahks to ₹7 lahks, offering a benefit of up to ₹25,000 in Tax.
Standard Deduction:
In the new regime, the standard deduction ₹50,000 is continued for salaried individuals as in the old regime. Pensioners from families may deduct ₹15,000 as a standard deduction.
Reduction of Surcharge:
The maximum tax rate has been lowered from 42.74% to 39% due to the reduction of the surcharge from 37% to 25% on annual Income exceeding ₹5 crores.
Exemption from Taxes on Leave Encashment:
Non-government employees now have a ₹25 lakh tax exemption cap on leave encashment, up from ₹3 lakh previously.
Insurance Plan Taxation:
Income from conventional insurance policies that have premiums more than ₹5 lakh will no longer be exempt from Tax.
Reduction of Tax Slabs:
There are now only five income tax slabs instead of the previous six.
B. What is Old Tax Regime?
Many deductions and exemptions, such as those under Section 80C, HRA, LTA, and other provisions, are available under the long-standing previous tax system. Taxpayers can use a variety of investment and cost claims to lower their taxable Income drastically.
For example, they can opt for either old or new in case of salary Rs 10,00,000/- per annum.
Example 1: If your annual salary is Rs 10,00,000 and you are paying rent Rs 2,50,000 yearly, and you have full of deductions like tuition fee, PF, LIC or Sukanya etc. up to Rs 1,50,000 yearly and have pay medical also Rs 50,000 per year including your parents.
Then it would help if you preferred the old tax regime.
Calculation as under the old regime:
Annual Income Rs 10,00,000
Less: Standard deduction Rs. 50,000
Less: HRA (assume fully exempt) Rs 2,50,000
——————
Rs. 7,00,000
Less deduction u/s 80C Rs. 1,50,000
Less Deduction u/s 80D Rs . 50,000
——————–
Rs. 5,00,000
Tax on the first Rs. 2,50,000 is NIL
On the Next Rs. 2,50,000 is Rs 12500
Total tax Rs 12500
Rebate allowed u/s 87A up to Rs 12500; hence, the final tax liability is NIL in this case.
In the above example, if you prefer a new tax regime, then you will not be eligible for various deductions like HRA, 80C and 80D; hence, your tax liability will be higher in that case.
Calculation under the new regime:
Out of Rs 10,00,000 less Rs. 50,000 (standard deduction)
Hence net taxable income Rs 9,50,000.
Tax calculation:
Out of Rs. 9,50,000 first Rs 3,00,000 tax will be NIL,
on next Rs 3,00,000 tax @5% i.e. Rs. 15,000,
on next Rs 3,00,000 tax @10% i.e. Rs.30,000
on balance Rs 50,000 @15% tax will Rs. 7,500.
Hence, the total Tax will be Rs.52,500 (Rs. 15,000+Rs. 30,000+Rs. 7,500)
Add: Education cess@4%, i.e. Rs.2,100 on Rs 52,500
The total Tax payable will be Rs 54600/- on an income of Rs. 10,00,000.
Example 2: In case of salary is Rs 50,00,000 per annum.
Tax under the new tax regime Rs. 12,50,000
Tax under the old tax regime Rs 17,75,000
Hence, there will be net savings if you opt for a new tax regime of Rs 5,25,000.
Note: Here, the new tax regime is a better option for saving tax from salary.
In case of yearly expenses and deductions and the same eligibility as per the old regime, then the old tax regime is a better option.
In the case of senior citizens or those of retirement age, then, opting for the old tax regime is better.
Benefits and drawbacks of each tax regime
Read, there are some benefits like lower tax slab & easier filing in the new regime, while drawbacks like less flexibility & fewer deductions.
Benefits of New Tax Regime:
- Lower tax slabs: For those in lower income levels in particular, the tax slab regime may result in a reduced tax obligation.
- Easier filing: Most expenses no longer require deductions under the new regime tax slab.
Drawbacks of the New Tax Regime:
- Fewer deductions: In contrast to the previous system, the new one allows for fewer deductions. If you have large assets, expensive medical costs, or interest payments on a home loan, this could be detrimental.
- Less flexibility: Those who would have benefited more from deductions under the previous regime may find their capacity to reduce their taxable Income is limited by the absence of deductions under the new government, which could result in a greater tax burden.
Benefits of the Old Tax Regime:
- Deductions are numerous: You can deduct a wide range of costs, including investments in the Public Provident Fund (PPF), equity-linked savings plans (ELSS), education loans (Section 80E), National Pension System (NPS) investments under Section 80C, House Rent Allowance (HRA), medical expenses under Section 80D, interest on home loan repayment, and more. Your taxable Income is effectively reduced by these deductions, which lowers your tax liability.
- Designed with investors and high-spenders in mind: The previous system can provide considerable tax advantages by lowering your taxable Income if you make large investments in tax-saving devices, pay interest on a mortgage, or suffer high medical costs.
Drawbacks of the Old Tax Regime:
- Higher tax slabs: The old regime has larger tax slabs than the new one. This implies that even after taking deductions, you may still owe more Tax if your Income puts you in a higher tax bracket.
- Record-keeping burden: Under the previous regime, it was essential to keep thorough records of all claimed deductions. It can take a lot of effort and careful planning throughout the year to accomplish this.
Comparison of Tax Rates – Old Tax Vs New Tax Regime
Here is a comparison of Old Tax Regime vs New Tax Regime (Before Budget 2023),
Old Tax Regime vs New Tax Regime (After Budget 2023).
| Income Range | Old Tax Regime | New Tax Regime (Before Budget 2023) | New Tax Regime (After Budget 2023) |
| ₹0 – ₹2,50,000 | Nil | Nil | Nil |
| ₹2,50,001 – ₹3,00,000 | 5% | 5% | Nil |
| ₹3,00,001 – ₹5,00,000 | 5% | 5% | 5% |
| ₹5,00,001 – ₹6,00,000 | 20% | 10% | 5% |
| ₹6,00,001 – ₹7,50,000 | 20% | 10% | 10% |
| ₹7,50,001 – ₹9,00,000 | 20% | 15% | 10% |
| ₹9,00,001 – ₹10,00,000 | 20% | 15% | 15% |
| ₹10,00,001 – ₹12,00,000 | 30% | 20% | 15% |
| ₹12,00,001 – ₹12,50,000 | 30% | 20% | 20% |
| ₹12,50,001 – ₹15,00,000 | 30% | 25% | 20% |
| ₹15,00,000 and Above | 30% | 30% | 30% |
Which regime is better to opt for:
It would help if you went with the tax regime, which can be beneficial for now and in future also, but It can depend on a few things:
- Your annual salary range.
- Effective Tax is payable without taking benefit of exemptions or deductions.
- Effective Tax payable with taking benefit of exemptions or deductions.
- What is your current or future investment plan?
- Which one do you prefer, investments or home loan deductions, or do you want to pay Tax right now without investments in your pocket?
How to Choose Between Old and New Tax Regimes?
It is crucial to take into account the available tax deductions and exemptions while choosing between the old and new tax regimes. Under the previous tax system, find your net taxable Income by first calculating your gross Income and then subtracting all applicable exemptions and deductions. Standard deductions, exclusions for housing rent, investments in tax-saving devices, and other relevant deductions such as home loan interest and medical insurance premiums are included in this. Determine your tax liability under the previous tax regime after calculating your net taxable Income.
Subsequently, compute your tax obligation under the recently implemented tax system, which presents reduced tax rates but prohibits the majority of exemptions and deductions. Examine the tax obligations under both policies to determine which one requires a smaller tax payment.
Selecting the regime with the lowest tax obligation makes sense. Notifying your employer of your decision is also necessary so they can take the appropriate tax deduction at source (TDS) out of your pay. This helps to prevent errors when preparing your annual tax return by guaranteeing that your monthly TDS accurately represents the tax regime you have selected.
Give serious thought to these factors if you have lost money from your home, investments, or Income from your business or career. In comparison to the new regime, the previous regime might provide superior benefits for adjusting these deductions and losses. It’s important to assess your complete financial status, including all revenue streams, possible deductions, and individual financial objectives, in order to make an informed choice.
How to opt for an old or new regime:
- Option 1: Through declaration under form 12B to the employer at the beginning of the financial year.
- Option 2: At the time of filing ITR online. After confirmation of the yes or no option for leaving the new regime,
Comparison of Exemptions & deduction in Old Tax Vs New Tax Regime
Here is a detail of all exemption or deductions allowed or not allowed under each old or new tax regime.
| Particulars | Old Tax regime | Updated New tax regime for FY 2023-24 (after buget 2023) |
| Maximum Income eligible for rebate u/s 87A (i.e. effective Tax free income or Not liable to tax) | 5,00,000 | 7,00,000 |
| Standard Deduction from Salary | 50,000 | 50,000 |
| Standard Deduction (family pension) | Allowed | Allowed |
| House Rent Allowance/HRA exemption 10(13A) | Allowed | Not Allowed |
| LTA/ other deductions | Allowed | Not Allowed |
| Professional tax | Allowed | Not Allowed |
| Perquisites for official duty | Allowed | Allowed |
| Interest on Home loan u/s 24(b)-self-occupied/vacant | Allowed | Not Allowed |
| Interest on Home loan u/s 24(b)-for let-out property | Allowed | Allowed |
| 80C (chapter VIA)- like LIC, PPF, Tuition fees, Mutual funds, home loan Principal, Sukanya etc | Allowed | Not Allowed |
| 80D -Medical Insurance | Allowed | Not Allowed |
| 80G- Donation | Allowed | Not Allowed |
| NPS contribution by employee | Allowed | Not Allowed |
| NPS contribution by employer | Allowed | Allowed |
| Interest on Education loan u/s 80E | Allowed | Not Allowed |
| Interest on Electric vehicle loan u/s 80EEB | Allowed | Allowed |
| Saving bank Interest u/s 80TTA/TTB | Allowed | Not Allowed |
| Any Other deductions under chapter- VIA | Allowed | Not Allowed |
| 80U- Disabled person | Allowed | Not Allowed |
| Gift upto Rs 50000 | Allowed | Allowed |
| Exemption on voluntary retirement u/s 10(10C) | Allowed | Allowed |
| Gratuity Exemption u/s 10(10) | Allowed | Allowed |
| leave encashment u/s 10(10A) | Allowed | Allowed |
| Rebate u/s 87A | 12500 | 25000 |
Tax saving options for salaried persons:
If you want to create a big fund for the future with yearly investment savings, then go with the old tax regime, which is subject to checking tax liability and vice versa. If you have no plan for investments or want to save, then you should check -which tax regime is better to minimize your income tax liability.
For better tax planning, you should have better knowledge of Income Tax laws and applicable slabs for a particular financial year or assessment year. So, it would help if you studied both of the tax options and then calculated the tax liability in each tax regime accordingly.
Note: Proper calculation can give you better results; hence, if you need the help of some tax experts, then contact them & get advice.
Conclusion:
The decision between the new regime and the old regime is based on personal financial objectives and circumstances. Here’s an overview to help with your decision:
- Choose the New Tax Regime if you would rather have a streamlined tax filing process and have few investments in tax-saving instruments. Those with higher salaries and those who don’t take large deductions will benefit most from it.
- If you can claim a variety of deductions and exemptions and have significant investments in tax-saving plans, stick with the old tax regime. It is more advantageous for people who actively manage their taxes and pursue long-term financial objectives.
- Ultimately, to find the best tax regime for you, evaluate your unique financial circumstances and, if necessary, get advice from a tax professional. Rely on KcorpTax to reduce your tax filing anxiety.
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Put your trust in KcorpTax for a smooth online ITR filing/tax filing process, so you can concentrate on the things that are really important to you. Get in touch with us right now, and we’ll handle the complicated income tax return filing process on your behalf to ensure financial efficiency and peace of mind.
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FAQ’s on Old Tax Regime vs New Tax Regime:
1. What is the old tax system?
Taxpayers could claim a range of deductions and exemptions under various Income Tax Act sections under the previous tax regime. Despite having higher tax rates, you can use investments and spending to lower your taxable Income.
2. What is the new system of taxes?
The new tax system unveiled in Budget 2020 offers reduced tax rates but eliminates the majority of exemptions and deductions. Simpler, although it might only help people with a small number of allowable deductions.
3. Do salaried workers benefit more from the new tax system?
Your financial status will determine this. The previous system might be preferable if you have numerous tax-saving assets and costs. The new system might be helpful if you value simplicity and reduced prices.
4. Can I change from the previous tax system to the current one?
Yes, you can change it while filing your taxes annually. But, if you receive Income from your firm, you have to stick to the plan that you selected the year before.
5. Does the new tax system have any restrictions?
Indeed, deductions under sections 80C, 80D, and 80E, as well as benefits like Leave Travel Allowance (LTA) and House Rent Allowance (HRA), are not permitted under the new tax structure.
6. Can I deduct expenses under the previous and current tax regimes?
No, you are not allowed to combine deductions from both regimes and must select just one for the fiscal year.
7. If my Income is seven lakhs, which tax regime should I select?
Because of Section 87A’s complete tax refund, which essentially results in no tax due, the new tax regime is preferable for incomes up to Rs. 7 lakhs.
8. With a salary of 15 lakhs, which tax regime is preferable?
The previous system could have been preferable if your tax-saving investments and expenses total more than Rs. 3,58,000. The new system may be more advantageous and simpler for smaller deductions.
9. Which tax system is better for someone making twenty lakhs a year?
In general, the previous system is preferable if your deductible costs and investments exceed Rs. 3,75,000. Other than that, the new system is straightforward and effective.
10. With a salary of thirty lakhs, which tax system is more profitable?
Because the higher income bands under the new system have lower tax rates than under the previous one, the new regime is often more advantageous even in the absence of any deductions.