Understanding the difference between Old and New Tax Regime in India

In India, the government introduced a new optional tax regime from the financial year 2020-21 onwards to simplify the tax structure and lower tax rates. With the new provisions introduced in the Union Budget 2023, the new tax regime has become the default one, replacing the old tax regime that existed before.

However, taxpayers still have the choice to switch to the old regime if they find it more beneficial based on their income level and deductions/exemptions available. Let's understand the difference between old and new tax regimes with respect to tax rates, deductions available, and how they can help you in tax planning.

• Table of contents

1. Tax rates under old vs new regime
2. Deductions allowed
3. Impact on taxpayers across slabs
4. Other budget provisions

Tax rates under old vs new regime

Under the old tax regime, there were 3 tax slabs with rates ranging from 5% to 30% excluding cess and surcharges. Taxpayers were eligible for a host of around 70 exemptions and deductions that could significantly reduce their tax outgo.

On the other hand, the new tax regime offers significantly lower tax rates within 5 slabs ranging from 5% to 30%. However, taxpayers opting for the new regime will not be eligible for most common deductions like HRA, LTA, 80C, home loan interest, etc.

To illustrate – for an income between Rs. 9-12 lakh, the tax rate is 30% under the old regime but only 15% under the new. Similarly, income above Rs. 15 lakh attracts a maximum rate of 30% in the old regime versus 15% in the new regime. Below is a tabular comparison of new tax regime vs old regime.

Deductions allowed

Some key deductions like family pension deduction, and employer's NPS contribution are now available in both regimes. However, the old regime allows nearly 70 exemptions and deductions like HRA, LTA, Section 80C investments up to Rs. 1.5 lakh, home loan interest, medical insurance, tuition fees, children education allowance, leave encashment etc. These exemptions are not permitted under the new regime.

Impact on taxpayers across slabs

Income up to Rs. 15 lakh annually

It is estimated that the new tax regime could be more tax efficient for individuals with an annual income of up to Rs. 15 lakh. In this income bracket, the lower tax rates under the new regime along with limited deductions make it advantageous compared to the old tax regime. The standard deduction available in both regimes and other deductions like NPS contribute further to reducing the tax outgo.

Income between Rs. 15-20 lakh annually

For those earning an annual income exceeding Rs. 20 lakh, the old tax regime is likely to be more tax efficient. At higher income levels, the substantial deductions and exemptions available exclusively in the old regime can significantly offset tax payments. The savings may outweigh the benefits of lower tax rates of the new tax regime for individuals with income above Rs. 20 lakh.

Income above Rs. 20 lakh annually

For those earning an annual income exceeding Rs. 20 lakh, the old tax regime is likely to be more tax efficient. At higher income levels, the substantial deductions and exemptions available exclusively in the old regime can significantly offset tax payments. The savings may outweigh the benefits of lower tax rates of the new tax regime for individuals with income above Rs. 20 lakh.

Other budget provisions

The Budget 2023 introduced some changes to make new regime more attractive:

·       Increased basic exemption limit to Rs. 3 lakh from Rs. 2.5 lakh in old regime

·       Total tax rebate raised to Rs. 7 lakh from Rs. 5 lakh earlier 

·       Simplified and reduced surcharge rates for high income individuals

·       Leave encashment exemption limit increased 8 times to Rs. 25 lakh

To sum up, the below table explains the basic comparisons between old vs new tax regime

Conclusion

Whilst the new tax regime offers simplicity with lower rates and fewer deductions, the old regime allows optimising tax outgo substantially through various exemptions for eligible taxpayers. Individuals must evaluate their tax liabilities after claiming all deductions/exemptions in both regimes to choose what fits them best. Overall, the new regime could be relatively advantageous for most individual taxpayers with annual income up to Rs. 15 lakh.

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