Old Tax Regime vs New Tax Regime
Last Updated: 19th August 2024 - 11:26 am
When it comes to paying taxes in India, things have gotten a bit more interesting lately. The government has introduced a new tax system alongside the old one, giving taxpayers more options. But with choice comes the need to understand what's best for you. Let's break down the old and new tax regimes for 2024-25 in simple terms so you can make an informed decision about which one suits you better.
What is an income tax slab?
Think of income tax slabs as different levels of a staircase. As your income climbs higher, you pay a higher percentage of tax on the money you earn at each level. This system is designed to be fair - people who earn more pay a higher rate on their additional income.
In India, we have separate tax slabs for different age groups:
● People under 60 years old
● Senior citizens (60 to 80 years)
● Super senior citizens (above 80 years)
The government often tweaks these slabs during the annual budget announcements to adjust for inflation and economic conditions.
New Tax Regime
The new tax regime, introduced in 2020 and further modified in the 2023 budget, aims to simplify the tax structure. Here's what you need to know:
1. It offers lower tax rates compared to the old regime.
2. There are fewer deductions and exemptions available.
3. It's now the default option unless you choose otherwise.
On July 23, 2024, Finance Minister Nirmala Sitharaman introduced adjustments to the tax structure under the revised tax regime. These changes reflect a difference in tax slabs before and after the budget.
Tax Slab for FY 2023-24 | Tax Slab | Tax Slab for FY 2024-25 | Tax Slab |
Upto ₹ 3 lakh | Nil | Upto ₹ 3 lakh | Nil |
₹ 3 lakh - ₹ 6 lakh | 5% | ₹ 3 lakh - ₹ 7 lakh | 5% |
₹ 6 lakh - ₹ 9 lakh | 10% | ₹ 7 lakh - ₹ 10 lakh | 10% |
₹ 9 lakh - ₹ 12 lakh | 15% | ₹ 10 lakh - ₹ 12 lakh | 15% |
₹ 12 lakh - ₹ 15 lakh | 20% | ₹ 12 lakh - ₹ 15 lakh | 20% |
More than 15 lakh | 30% | More than 15 lakh | 30% |
The 2024 Budget has increased the standard deduction to ₹75,000 and the family pension deduction to ₹25,000 under the new tax system. These changes will result in a tax savings of ₹17,500 for taxpayers.
Here are some key features of the New Tax Regime
● Tax Rates: Offers lower rates across different income slabs but requires forgoing many deductions and exemptions.
● Default Option: Automatically applied unless the old regime is specifically chosen.
● Exemption Limit: Increased to ₹3 lakhs from ₹2.5 lakhs in the old regime.
● Tax Rebate: Under Section 87A, a tax rebate is available for income up to ₹7 lakhs, compared to ₹5 lakhs in the old regime.
● Standard Deduction: ₹75,000 for salaried individuals; family pension deduction increased to ₹15,000 or 1/3rd of the pension, whichever is lower.
● Surcharge Reduction: For high-income earners, the maximum surcharge rate is reduced from 37% to 25% on income exceeding ₹5 crores.
● Leave Encashment: The exemption limit for non-government employees increased to ₹25 lakhs.
● LTCG Benefit: Not available on debt funds invested after March 31, 2023.
Old Tax Regime
The old tax regime has been around for a long time and offers various deductions and exemptions. Here's a quick look at the tax slabs under the old regime:
Income Tax Slab | Old Tax Regime | New tax Regime (Before budget 2023) |
₹0 - ₹2,50,000 | - | - |
₹2,50,001 - ₹3,00,000 | 5% | 5% |
₹3,00,001 - ₹5,00,000 | 5% | 5% |
₹5,00,001 - ₹6,00,000 | 20% | 10% |
₹6,00,001 - ₹7,50,000 | 20% | 10% |
₹7,50,001 - ₹9,00,000 | 20% | 15% |
₹9,00,001 - ₹10,00,000 | 20% | 15% |
₹10,00,001 - ₹12,00,000 | 30% | 20% |
₹12,00,001 - ₹12,50,000 | 30% | 20% |
₹12,50,001 - ₹15,00,000 | 30% | 25% |
More than ₹15,00,000 | 30% | 30% |
Here are some key features of the Old Tax Regime:
● Section 80C: Allows deductions up to ₹1.5 lakhs for investments in specified savings schemes.
● Section 80D: Offers deductions up to ₹50,000 for medical expenses.
● Section 80TTB: Permits deductions up to ₹10,000 on interest income from savings accounts and post office deposits.
● House Rent Allowance (HRA): Deductible based on specific calculations.
● Leave Travel Allowance (LTA): Deductible as per prescribed rules.
● Tax Rebate: Available under Section 87A for income up to ₹5 lakhs.
● Standard Deduction: Salaried individuals can claim up to ₹50,000.
● The old regime allows for various deductions like 80C investments, home loan interest, and more, which can significantly reduce your taxable income.
Difference Between Old vs New Tax Regime: Which is Better?
Choosing between the old and new tax regimes depends on several factors, including your income level, investment goals, and the simplicity of tax filing. Here's a breakdown to help you decide:
Investment Goals
● Old Regime: Ideal if you have long-term investment goals such as retirement savings or building a financial corpus. This regime allows you to claim deductions on contributions to various investment instruments like PPF, ELSS, and more.
● New Regime: Suitable if you're not keen on investing in tax-saving instruments and prefer flexibility. It offers lower tax rates without requiring specific investments.
Simplicity
● Old Regime: Involves calculating and claiming multiple deductions and exemptions, which can make tax filing more complex.
● New Regime: Simpler, as it eliminates the need for detailed documentation and calculation of deductions, making the tax filing process quicker and easier.
Income Level
● Old Regime: May be more beneficial for those with higher incomes who can maximize deductions and exemptions.
● New Regime: Offers lower tax rates, making it more beneficial for individuals with higher incomes. For example, as per the 2023 budget, an individual earning ₹9 lakh annually would pay ₹45,000 in taxes under the new regime, compared to ₹92,500 under the old regime—a significant saving.
Deductions and Exemptions
1. Old Regime: Allows various deductions, such as ₹1.5 lakh under Section 80C and ₹2 lakh under Section 24(b) for interest on a home loan, totaling up to ₹3.5 lakh.
2. New Regime: Does not offer such deductions, though it does provide a standard deduction.
Tax under Old vs New Regime
Let's examine the income and investment profiles of two hypothetical taxpayers for the fiscal year 2023-24:
Income and Investment Details (in ₹)
Particulars | Taxpayer A(₹) | Taxpayer B (₹) |
Salary Income | 20,00,000 | 10,00,000 |
House Rent Allowance (HRA) | 1,20,000 | 1,00,000 |
Leave Travel Allowance (LTA) | 50,000 | 50,000 |
Standard Deduction | 50,000 | 50,000 |
Section 80C Deductions | 1,50,000 | 1,50,000 |
Tax Calculation for Tax Payer A
Particulars | Old Regime (₹) | New Regime (₹) |
Gross Salary | 20,00,000 | 20,00,000 |
Less: HRA Exemption | 1,20,000 | Not Applicable |
Less: LTA Exemption | 50,000 | Not Applicable |
Less: Standard Deduction | 50,000 | 50,000 |
Less: Section 80C Deduction | 1,50,000 | Not Applicable |
Taxable Income | 16,30,000 | 19,50,000 |
Income Tax Payable | 3,13,000 | 3,12,000 |
Tax Calculation for Taxpayer B
Particulars | Old Regime (₹) | New Regime (₹) |
Gross Salary | 10,00,000 | 10,00,000 |
Less: Standard Deduction | 50,000 | 50,000 |
Less: HRA Exemption | 1,00,000 | Not Applicable |
Less: LTA Exemption | 50,000 | Not Applicable |
Less: Section 80C Deduction | 1,50,000 | Not Applicable |
Taxable Income | 6,50,000 | 9,50,000 |
Income Tax Payable | 42,500 | 52,500 |
Choosing Between Tax Regimes: Key Considerations
When deciding between the old and new tax regimes, consider:
● Annual income level
● Investment habits and goals
● Family circumstances
● Risk appetite
General Observations:
The new regime may benefit middle-income earners (up to ₹15 lakhs) with limited deductions.
High-income earners (above ₹15 lakhs) with substantial investments might prefer the old regime.
If your deductions exceed ₹3.75 lakhs annually, the old regime could be more advantageous.
For deductions between ₹1.5 lakhs and ₹3.75 lakhs, the optimal choice depends on your specific income bracket.
The new regime could be favourable if your annual deductions are below ₹1.5 lakhs due to lower tax rates.
Those with significant investments in tax-saving instruments, medical expenses, life insurance, education costs, or home loans may benefit more from the old regime's deductions.
To make an informed decision, it's crucial to analyse both regimes based on your individual financial situation, as the most suitable option varies from person to person.
What Deductions and Exemptions Are Allowed Under the New Tax Regime?
While the new tax regime has fewer deductions than the old one, it still allows some. Here's what you can claim:
Particulars | Old Tax Regime | New Tax Regime (Until 31st March 2023) | New Tax Regime (From 1st April 2023) |
Income Level for Rebate Eligibility | ₹ 5 lakhs | ₹ 5 lakhs | ₹ 7 lakhs |
Standard Deduction | ₹ 50,000 | Not Applicable | ₹ 50,000 |
Effective Tax-Free Salary Income | ₹ 5.5 lakhs | ₹ 5 lakhs | ₹ 7.5 lakhs |
Rebate u/s 87A | ₹ 12,500 | ₹ 12,500 | ₹ 25,000 |
HRA Exemption | Available | Not Available | Not Available |
Leave Travel Allowance (LTA) | Available | Not Available | Not Available |
Other Allowances (e.g., food allowance) | Available | Not Available | Not Available |
Entertainment Allowance and Professional Tax | Available | Not Available | Not Available |
Perquisites for Official Purposes | Available | Available | Available |
Interest on Home Loan u/s 24b (Self-occupied/Vacant Property) | Available | Not Available | Not Available |
Interest on Home Loan u/s 24b (Let-out Property) | Available | Available | Available |
Deduction u/s 80C (EPF, LIC, ELSS, etc.) | Available | Not Available | Not Available |
Employee’s Contribution to NPS | Available | Not AvailableQ | Not Available |
Employer’s Contribution to NPS | Available | Available | Available |
Medical Insurance Premium (u/s 80D) | Available | Not Available | Not Available |
Deduction for Disabled Individuals (u/s 80U) | Available | Not Available | Not Available |
Interest on Education Loan (u/s 80E) | Available | Not Available | Not Available |
Interest on Electric Vehicle Loan (u/s 80EEB) | Available | Not Available | Not Available |
Donations to Political Party/Trust (u/s 80G) | Available | Not Available | Not Available |
Savings Bank Interest (u/s 80TTA and 80TTB) | Available | Not Available | Not Available |
Other Chapter VI-A Deductions | Available | Not Available | Not Available |
Contributions to Agniveer Corpus Fund (u/s 80CCH) | Available | Not Applicable | Available |
Deduction on Family Pension Income | Available | Not Available | Available |
Gifts up to ₹ 50,000 | Available | Available | Available |
Exemption on Voluntary Retirement (u/s 10(10C)) | Available | Available | Available |
Exemption on Gratuity (u/s 10(10)) | Available | Available | Available |
Exemption on Leave Encashment (u/s 10(10AA)) | Available | Available | Available |
Daily Allowance | Available | Available | Available |
Conveyance Allowance | Available | Available | Available |
Transport Allowance for Specially-Abled Individuals | Available | Available | Available |
Conclusion
The choice between the old and new tax regimes is not just about paying less; it's about aligning your tax strategy with your overall financial goals. The new regime offers simplicity and potentially lower tax rates, which can be attractive for many. However, with its array of deductions, the old regime can still benefit those who actively plan their taxes and investments.
Remember, there's no universally "better" option. Your ideal choice depends on your income level, investment habits, life stage, and financial objectives. Take the time to understand both regimes, use the tools available to calculate your tax liability under each, and don't hesitate to seek professional advice if needed.
As India's tax system evolves, staying informed and adaptable will be key to optimizing your tax strategy. Whether you choose the old or new regime, the goal remains: to manage your finances efficiently while contributing your fair share to the nation's development.
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