Old Tax Regime vs New Tax Regime: Which One Should You Choose?
The introduction of the new tax regime and the existence of the old tax regime has left many Indian taxpayers confused. This blog explains the old and new tax regimes in detail and will help you understand which tax regime can benefit you. Learn through step-by-step explanations.
In the 2020-2021 Union Budget, a new tax regime (optional) was introduced for Indian taxpayers. Given the unattractive and higher tax rates, it was not very popular then. However, in the Union Budget 2023, Finance Minister Nirmala Sitharaman announced a major change in the new tax regime so that more and more taxpayers adopt it. This tweak was made to –
- Simplify the tax structure and make it more taxpayer-friendly.
- Reduce the tax burden on taxpayers, particularly in the lower and middle-income brackets.
- Provide more flexibility to taxpayers in choosing the tax regime according to their needs.
Content
- Old vs New Tax Regime – Which One Should You Choose?
- Old vs New Tax Regime – Step-by-Step Explained Through Example
- Exemptions on New Tax Regime
- Advantages of the New Tax Regime
- Disadvantages of the New Tax Regime
- Income Tax Slabs & Rates for AY 2024-25 (FY 2023-24)
- Income Tax Slabs & Rates for Senior Citizens in AY 2024-25 (FY 2023-24)
Old vs New Tax Regime – Which One Should You Choose?
Choosing between old and new tax regimes can be tricky. It depends on your financial condition/salary/income.
If you earn between Rs. 10-15 LPA, the new tax regime will be better for you since the old tax regime calls for 30% of deductions, while the new one asks for 25% of reduction.
However, the new regime has the non-availability of various deductions or exemptions. You must carefully study your income and underlying financial conditions before choosing one.
Here is a tabular comparison of the rates according to both types of tax regimes –
| Income Range | Old Regime | New Regime (2023-24) |
|---|---|---|
| Up to Rs. 2,50,000 | Nil | Nil |
| Rs. 2,50,001 – 5,00,000 | 5% | 5% |
| Rs. 5,00,001 – 7,50,000 | 20% | 10% |
| Rs. 7,50,001 – 10,00,000 | 20% | 15% |
| Rs. 10,00,001 – 12,50,000 | 30% | 20% |
| Rs. 12,50,001 – 15,00,000 | 30% | 25% |
| Above Rs. 15,00,000 | 30% | 30% |
check out this video to understand how these two tax regimes work in this video by Asset Yogi
Read LaterBest-suited Tax Law courses for you
Learn Tax Law with these high-rated online courses
Old vs New Tax Regime – Step-by-Step Explained Through Example
Understand this through an example. Suppose Jaya, who is 30 years old, earns Rs. 13,00,000 Per Annum. She has invested Rs. 1,50,000 under section 80C and Rs. 20,000 under section 80D. Now let us check which tax regime is more beneficial for her.
Here are the detailed calculations for both tax regimes:
| Old Tax Regime | New Tax Regime | |
|---|---|---|
| Gross income | Rs. 13,00,000 | Rs. 13,00,000 |
| Total deductions | Rs. 1,50,000 + Rs. 20,000 = Rs. 1,70,000 | Rs. 50,000 |
| Net taxable income | Rs. 13,00,000 – Rs. 1,70,000 = Rs. 11,30,000 | Rs. 13,00,000 – Rs. 50,000 = Rs. 12,50,000 |
| Tax on Rs. 0 – 2,50,000 | 0 | 0 |
| Tax on Rs. 2,50,000 – 5,00,000 | Tax @5% = 0.05*(500000- 250000) = 12,500 | Tax @5% = 0.05*(500000- 250000) = 12,500 |
| Tax on Rs. 5,00,000 – 7,50,000 | Tax @20% = 0.2* (7,50,000 -5,00,000) = 50,000 | Tax @10% = 0.1* (7,50,000 -5,00,000) = 25,000 |
| Tax on Rs. 7,50,000 – 10,00,000 | Tax @20% = 0.2* (10,00,000 -7,50,000) = 50,000 | Tax @15% = 0.1* (10,00,000 -7,50,000) = 37,500 |
| Tax on Rs. 10,00,000 – 11,30,000 (taxable amt) | Tax @30% = 0.3* (11,30,000 -10,00,000) = 39000 | |
| Tax on Rs. 10,00,000 – 12,50,000 (taxable amt) | Tax @20% = 0.2* (12,50,000 -10,00,000) = 50000 | |
| Total tax | 12,500 + 50,000 + 50,000 + 39,000 = Rs. 151,500 | 12,500 + 25,000 + 37,500 + 50000 = Rs. 125,000 |
| Cess | 4% of total tax (12,500 + 50,000 + 50,000 + 39,000 + 151,500) = Rs. 12120 | 4% of total tax (12,500 + 25,000 + 37,500 + 50000 + 125,000) = Rs. 10000 |
| Total tax to be paid on Rs. 13,00,000 (Total tax + cess) |
Rs. 151,500 + 12,120 = Rs. 163,620 | Rs. 125,000 + 10,000 = Rs. 135,000 |
As you can see, Jaya’s tax liability is lower under the new tax regime than it is under the old tax regime. This is because the tax rates are lower under the new tax regime.
Therefore, Jaya should opt for the new tax regime.
Exemptions on New Tax Regime
Listed below are the exemptions available under the new tax regime in India:
| Exemptions | Maximum Limit |
|---|---|
| Deduction on Family Pension Income | Rs. 15,000 or 1/3rd of the pension, whichever is lower. |
| Gifts up to Rs. 5,000 | Rs. 5,000 |
| Exemption on voluntary retirement (Section 10(10C)) | Rs. 5 lakh |
| Income tax exemption on gratuity (Section 10(10)) | Rs. 20 lakh |
| Interest on Home Loan on the let-out property (Section 24) | Up to the actual amount paid |
| Deduction for employer’s contribution to NPS account (Section 80CCD(2)) | Up to 10% of the salary |
| Deduction for additional employee cost (Section 80JJAA) | Up to Rs. 3,000 annually |
| Standard Deduction | Rs. 50,000 |
Taxpayers who choose the new regime cannot claim any other deductions or exemptions available under the old regime.
Deductions and exemptions unavailable under the new tax regime are –
- House Rent Allowance (HRA)
- Leave Travel Allowance (LTA)
- Children Education Allowance (CEA)
- Medical Insurance Premium
- Donations to charitable organizations
- Interest in education loan
- Investments in specified savings schemes
Advantages of the New Tax Regime
- Lower tax rates: The new tax regime offers lower tax rates than the old one, particularly for the lower and mid-income groups. Taxpayers can save money on their taxes by switching to the new regime.
- Increased liquidity: The new tax regime can give taxpayers more flexibility in using their money. For example, taxpayers who have more money after paying taxes may be able to save more, take advantage of investment opportunities, or spend more on discretionary items.
- Simpler tax structure: The new tax regime is simpler than the old one. It is easier to understand and comply with the tax laws. This can save taxpayers time and money, as they will not have to spend as much time figuring out how to file their taxes.
- Lower compliance cost: The new tax regime has a simpler structure, meaning taxpayers will have lower compliance costs.
- Improved tax administration: The new tax regime is expected to improve tax administration, as it will be easier for the government to track taxpayers’ income and expenses.
Disadvantages of the New Tax Regime
- No deductions or exemptions: The new tax regime has no deductions or exemptions. Taxpayers cannot claim any deductions or exemptions for medical expenses, education expenses, or investments.
- Less flexibility: The new tax regime is less flexible than the old one since the taxpayers may be unable to choose the deductions or exemptions that could have benefited them.
- May not benefit taxpayers with high deductions: The new tax regime may not benefit taxpayers with high deductions since they can’t claim any deductions or exemptions. Here are some examples of taxpayers who may not benefit from the increased liquidity under the new tax regime:
- Taxpayers with high medical expenses
- Taxpayers with high education expenses
- Taxpayers who make investments in specified savings schemes
- Taxpayers who donate to charitable organizations
- May lead to tax evasion: The lower tax rates under the new regime may encourage tax evasion, as taxpayers may be tempted to underreport their income.
Income Tax Slabs & Rates for AY 2024-25 (FY 2023-24)
| Slabs | Old Tax Regime | New Tax Regime |
|---|---|---|
| Rs. 0 – 2,50,000 | 0 | 0 |
| Rs. 2,50,001 – 3,00,000 | 5% | 0 |
| Rs. 3,00,001 – 5,00,000 | 5% | 5% |
| Rs. 5,00,001 – 6,00,000 | 20% | 5% |
| Rs. 6,00,001 – 7,50,000 | 20% | 10% |
| Rs. 7,50,001 – 9,00,000 | 20% | 10% |
| Rs. 9,00,001 – 10,00,000 | 20% | 15% |
| Rs. 10,00,001 – 12,00,000 | 30% | 15% |
| Rs. 12,00,001 – 12,50,000 | 30% | 20% |
| Rs. 12,50,001 – 15,00,000 | 30% | 20% |
| >Rs. 15,00,000 | 30% | 30% |
Income Tax Slabs & Rates for Senior Citizens in AY 2024-25 (FY 2023-24)
Taxpayers aged 60 – 80 are considered Senior Citizens per the Income Tax Act, 1961. They also get a higher exemption limit under the old tax regime.
However, this benefit is unavailable under the new AY 2024-25 tax regime.
Let’s compare the income tax slabs and rates for senior citizens as per the old and the new tax regime for FY 2023-24:
| Annual Taxable Income | New Tax Regime | Old Tax Regime |
|---|---|---|
| Up to Rs. 3,00,000 | Exempt | Exempt |
| Rs. 3,00,001 – 5,00,000 | 5% | 5% |
| Rs. 5,00,001 – 6,00,000 | 5% | 20% |
| Rs. 6,00,001 – 9,00,000 | 10% | 20% |
| Rs. 9,00,001 – 10,00,000 | 15% | 20% |
| Rs. 10,00,001 – 12,00,000 | 15% | 30% |
| Rs. 12,00,001 – 15,00,000 | 20% | 30% |
| Above Rs. 15, 00,000 | 30% | 30% |
Conclusion
Please note that the new tax regime offers lower tax rates than the old regime, but taxpayers cannot claim certain deductions and exemptions under the new regime. The choice of which regime to opt for depends on individual circumstances. The new tweaks in the New Tax Regime will affect the financial year FY2023-24, translating to assessment year (AY) 2024-25.
Hope this blog helped you understand both tax regimes and could assist you in choosing the suitable one for yourself.
FAQs
What is the difference between the old and new tax regimes?
The last slab in the old regime was tax at 30 percent on income above 10,00,000. The new regime has 15 percent for income between 9 - 12 lakhs. There is another slab between 12 -15 lakhs, taxable at 20 percent & income bracket above 15 lakhs per annum is taxable at 30 percent.
Which tax regime is better for me?
Your best tax regime will depend on your circumstances and financial goals. You may be better off under the old tax regime if you have high deductions or exemptions. However, you may be better off under the new tax regime if you do not have any deductions or exemptions.
How do I choose between the old and new tax regimes?
A tax calculator can compare your tax liability under both regimes. You can also consult with a tax advisor to get help deciding.
Can I switch between tax regimes?
If you are salaried, you can switch between the tax regimes while filing returns. But those who run businesses or are self-employed can switch only once during their lifetime.
What are the penalties for not filing taxes under the new tax regime?
The penalties for not filing taxes under the new tax regime are the same as those for not filing taxes under the old tax regime. These penalties include late filing fees, interest, and penalties for underpaying taxes.
Rashmi is a postgraduate in Biotechnology with a flair for research-oriented work and has an experience of over 13 years in content creation and social media handling. She has a diversified writing portfolio and aim... Read Full Bio
Top Picks & New Arrivals
