Old vs New Tax Regime

Tanushree Jaiswal Tanushree Jaiswal

Last Updated: 18th July 2024 - 12:35 pm

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The new tax regime was first announced in Budget 2020 to give tax payers a simpler and smarter system with higher tax breaks and elimination of tax exemptions. However, that system never took off as most tax payers did not find the new tax regime (NTR) too attractive. Hence the penetration was less than 1%. What has changed in Union Budget 2023 is that the new tax regime has been made the default tax regime for all tax payers. Now, tax payers have to select and specifically opt for the old tax regime. In the absence of any choice exercised, the new tax regime would be your default choice. Here is all about the old vs new tax regime or the old regime vs new regime.

In the Union Budget 2023, Finance Minister Nirmala Sitharaman announced a major change to the new tax regime to ensure much greater and wider adoption. These changes will come into effect for FY24, which is the financial year from April 2023 to March 2024, and corresponding to the assessment year (AY) 2024-25. Also, the new tax regime has been slightly sweetened by raising the exemption limits and also including standard deduction of Rs50,000 as a deductible exemption for salaried tax payers and for pensioners. What you must know about old vs new tax regime and the old regime vs new regime.

Overview of the old tax regime

The old tax regime is the default regime that exists now, where your taxable income up to Rs5,00,000 is fully exempt from tax on account of the special rebate under Section 87. However, the old tax regime also offers a number of exemptions like Section 80C, Section 80D, Section 24, Section 80G etc. There is likely to be a big change from FY24 (financial year 2023-24) onwards. The new tax regime (NTR) will be the default tax regime for all tax payers, in contrast to the current system up to FY23, where the old tax regime is the default tax regime. That is the big shift from FY24 onwards. Now for the new tax regime vs old or what we call the new vs old tax regime.

Overview of the new tax regime

Here let us look at some of the key highlights of the new tax regime (NTR) and how it differs from the old tax regime. Let us first look at the tax slabs under the new tax regime to understand this old and new tax regime debate.

On Income

Tax Rate

Up to ₹ 3,00,000

Nil

From ₹ 3,00,001 to ₹ 6,00,000

5%

From ₹ 6,00,001 to ₹ 9,00,000

10%

From ₹ 9,00,001 to ₹ 12,00,000

15%

From ₹ 12,00,001 to ₹ 15,00,000

20%

Above ₹ 15,00,000

30%

 

Here are some of the key takeaways from the new tax regime. Let us understand the difference between old and new tax regime and the old tax regime and new tax regime.

•    Unlike the old tax regime that offered just 4 slabs, the new tax regime offers 6 slabs with tax advantages at each slab due to higher limits.

•    The new tax regime offers zero tax for income up to Rs3 lakh, and a tax rate rising by 5% for incremental income of Rs3 lakh each.

•    What is most interesting is that the above slabs will only apply to investors with income above Rs7 lakhs. Up to Rs7 lakh of taxable income, the income would be totally exempt from tax. Therefore, if you are a salaried individual or a pensioner, you have Rs7.50 lakhs of tax-free income since there is the added benefit of Rs50,000 standard deduction.

•    Effectively, how much would a person earning Rs10 lakh after standard deduction be paying as tax. In the table above, he would fall in the third slab. So, the tax calculation would be as under. 
 

On Income

Tax Rate

Tax Payable

Up to ₹ 3,00,000

Nil

Nil

From ₹ 3,00,001 to ₹ 6,00,000

5%

Rs15,000

From ₹ 6,00,001 to ₹ 9,00,000

10%

Rs30,000

From ₹ 9,00,001 to ₹ 12,00,000

15%

Rs15,000

Total Tax payable

 

Rs60,000

 

To sum up the new tax  regime, it offers higher limits and also offers the benefit of standard deduction of Rs50,000 for salaried and pensioners. However, all the other benefits have to be foregone. That is all about the difference between old and new tax regime as well as the old tax regime and new tax regime in a nutshell.

Key differences between the old and new tax regimes

We have seen that the new tax regime offers higher exemption limits for salaried brackets and the benefit of standard deviation. However, the new tax regime does not offer the benefit of other exemptions like Section 80C, Section 80D and Section 24 for home loans. Even HRA benefits are not available. Typically, the new tax regime is meaningful for income up to Rs12 lakhs per annum and where persons with higher income levels, do not have adequate exemption claims from Section 80C, Section 80D, Section 24 or from HRA. The comparative example below will illustrate the difference between old and new tax regime or the old tax regime and new tax regime nuances.

Here is calculation illustrated with an example of a person with income of ₹ 12 lakh. Let us first look at how the calculation looks like in the old tax regime. Here are assuming that the person is not claiming any benefit of exemption under the new tax regime.

Income Bracket

Tax Rate

Tax payable

Upto Rs250,000

0%

Nil

Rs250,001 to Rs5,00,000

5%

Rs12,500

Rs500,001 to Rs10,00,000

20%

Rs100,000

Rs10,00,001 onwards

30%

Rs60,000

Total Tax Payable

 

Rs172,500

 

Under the old tax regime, if the tax payer does not make any investments to claim exemptions, then the total tax payable would be a whopping Rs172,500 for the year. Now let us look at how this calculation would look for the new tax regime.

Income Bracket

Tax Rate

Tax payable

Upto Rs300,000

0%

Nil

Rs300,001 to Rs6,00,000

5%

Rs15,000

Rs600,001 to Rs9,00,000

10%

Rs30,000

Rs9,00,001 to Rs12,00,000

15%

Rs45,000

Total Tax Payable

 

Rs90,000

 

As can be seen from the above calculations, the person earning Rs12 lakhs per annum would be paying just Rs90,000 as tax as against Rs172,500 as tax in the old regime. That is a clear advantage. So, at what level would it be sensible for a person to opt for the old tax regime. Clearly, that would depend not only on the level of income, but also on the amount of investments that the tax payer can make to claim exemptions. Just to give an illustration, under the old regime, the tax payer will have to invest at least Rs2.50 lakhs to bring the tax at par with the new tax regime. The tax payer needs to take call based on this data.

Advantages and disadvantage of the old tax regime

What are the pros and cons of the old tax regime. The positive side is that the old tax regime offers a plethora of exemptions. For upwardly mobile professionals looking to use these exemptions, it is a good idea to opt for the old tax regime. However, on the downside, the old tax regime makes things a lot more complex as compared to the new tax regime, which is a lot more straightforward. The exemption bracket limits are also much lower in the old tax regime, as compared to the new tax regime.

Advantages and disadvantage of the old tax regime

Let us look at the merits of new tax regime. Clearly, the new tax regime makes sense for people with income up to the range of Rs12 to Rs15 lakhs. It is also suited to persons in higher income brackets, who do not have the need or wherewithal to claim tax benefits of at least Rs4.50 lakhs. In addition, the new tax regime is much simpler in concept, filing and execution compared to the old tax regime. More importantly, in the new tax regime, the tax payers do not have to keep detailed records for exemption claims.

However, there are also some downsides to the new tax regime, which cannot be overlooked. For instance, this is not suited to persons with higher amount of exemptions available to them. They are better off in the old tax regime. One more argument is that the old tax regime incentivized persons to mandatorily save through ELSS or PPF schemes. That benefit would be taken away in the new scheme.
 

How  to choose the right tax regime for you

As stated earlier, the decision on the right regime would entirely depend on the individual tax payer and their investment and exemption claiming ability. Typically, the new tax regime would continue to make sense for persons earning up to Rs15 lakhs since their ability for big investments will also be limited. However, the person must have the capability to claim exemptions like Section 80C, Section 80D, Section 24 for home loans, House Rent Allowance etc. Normally, for higher income groups with higher investment ability and the scope for managing more of exemptions, the old tax regime would still add value.

Conclusion

The choice of the old versus new tax regime would largely depend on the level of income and the ability and the scope to claim exemptions. Beyond that, it is a very micro choice to be made by the individual based on their unique circumstances. That is how you choose between the new and old tax regime.

 

FREQUENTLY ASKED QUESTIONS (FAQ)

What is the old tax regime?

Old tax regime is the existing system of taxation with all exemptions and more unfavourable tax brackets.

What is the new tax regime?

New tax regime is the default system of taxation for all tax payers from FY24 onwards. Persons wanting old tax regime have to opt for it. So much about the new and old tax regime.

Can I switch between the old and new tax regimes?

A shift is allowed for one time.

What happens if I choose the wrong tax regime?

You can always make one shift if you have chosen the wrong scheme.

How will the new tax regime affect my tax liability?

New tax regime will reduce your tax liability up to a certain level of income or if investment and exemption threshold is too low. That is about the new and old tax regime.
 

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