Old vs New Tax Regime

5paisa Research Team Date: 21 Nov, 2023 04:58 PM IST

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Introduction

Governments worldwide have made it mandatory for citizens to pay taxes on their earnings annually. The Indian government, the Income Tax Department, and the Finance Ministry created a tax regime that the Indian citizens followed until 2020.

In the 2020 annual budget, Indian Finance Minister, Nirmala Sitharaman, introduced a new tax regime offering simplified tax slabs against tax exemptions. Indian citizens can choose between the old and new tax regimes per their earnings and eligible tax deductions. 
 

What is the Old Tax Regime?

The old tax regime is the single tax structure followed until 2020, establishing specific tax slabs per the citizens' earnings to pay taxes and tax deductions for investing the earned amount.

When considering the difference between the old and new tax regimes, understanding the structure and the eligible exemptions is crucial. Most people in India utilize the old tax regime, which offers higher tax rates to the citizens but various ways to lower their taxable income. The old tax regime offered 70 tax exemptions per the Income Tax Act of 1961. 

In the old tax regime, the Income Tax Act provided some exemptions within the earned income, such as House Rent Allowance, Leave Travel Allowance, etc. However, numerous other exemptions are available through investing in various investment instruments such as an insurance plan or schemes such as Provident Funds. 
 

Deductions and Exemptions Under Old Tax Regime

Here are the deductions and exemptions available under the old tax regime: 

Deductions

Exemptions

Employee Provident Fund

Leave Encashment

Life Insurance Premium

Uniform Allowance

Equity Linked Savings Scheme

House Rent Allowance

Public Provident Fund

Leave Travel Allowance

Principal and Interest component of Home Loan

Mobile and Internet Reimbursement

Savings Account Interest

Food Vouchers or Coupons

Children’s Tuition Fee

Company Leased Car

Health Insurance Premium

Other Standard Deductions

NPS Investment

 

Advantages of Opting For Old Tax Regime

An advantage of filing taxes using the old tax regime is the exemptions and deductions available to the citizens, especially if you have various investments, such as an insurance plan, NPS, etc. 

Limitations of Old Tax Regime

Here are the limitations of the old tax regime: 

●    Investment Lock-in: Most investment instruments that provide deductions and exemptions have a lock-in period of several years, forcing investors to lock their money for tax rebates. 

●    Complexity: There are over 70 exemptions available in the old tax regime, making it complex for a citizen to choose ideal ones to claim deductions and exemptions. 
 

What Is the New Tax Regime?

In 2020, the Indian Finance Minister, Nirmala Sitharaman, introduced a new tax system called the New Tax Regime. It fueled the old vs new tax regime debate where citizens had to choose between the two.

The new tax regime offers lower tax rates than the old tax regime through six tax slabs. However, it does not include lowering tax liability through various tax deductions and exemptions. 

The only way to reduce the tax liability in the new tax regime is through the tax slabs, as there are no other deductions or exemptions. The new tax regime is apt for citizens who do not claim high deductions and exemptions to lower their tax liability. 
 

Advantages of Opting for the New Tax Regime

One of the key benefits is the lower tax rates offered for salaries up to Rs 15 Lakh through six tax slabs. When citizens opt for the new tax regime, they don’t have to maintain tax-saving investments such as PPF, ELSS, etc. It gives taxpayers more flexibility in managing their investments and finances.

Limitations of Opting for the New Tax Regime

Some of the limitations of opting for the new tax regime are:

●    No exemptions or deductions: Under the new tax regime, taxpayers cannot claim any exemptions or deductions such as HRA, LTA, standard deduction, Section 80C, 80D, etc.

●    Limited investment options: Taxpayers who opt for the new tax regime will have limited investment options as they cannot claim deductions under Section 80C, which includes popular investment options like PPF, NSC, ELSS, etc.
 

Income Tax Slab Rates for New Vs Old Tax Regime

Both regimes include different tax rates and available deductions and exemptions. One of the best ways to understand the new tax regime vs the old is to analyse the income tax slabs for the new vs old tax regime. Here is a side-by-side comparison of the different tax slabs.

Old Tax Slabs

Old Income Tax Rates

New Tax Slabs

New Income Tax Rates

Upto Rs 2.5 Lakh

Nil

Upto Rs 3 Lakh

 

NIL

Rs 2.5 Lakh–Rs 5 Lakh

5%

Rs 3 Lakh–Rs 6 Lakh

5%

Rs 5 Lakh–Rs 10 Lakh

20%

Rs 6 Lakh–Rs 9 Lakh

10%

Above Rs 10 Lakh

30%

Rs 9 Lakh–Rs 12 Lakh

15%

 

 

Rs 12 Lakh–Rs 15 Lakh

20%

 

 

Above Rs 15 Lakh

30%

 

 

 

 

 

 

Old Vs New Tax Regime: Which Is Better?

When filing taxes in India, numerous Indian taxpayers do not invest in any tax-deductible instruments. Without claiming any deductions or exemptions, they pay a higher tax on their taxable income as the tax rates are higher in the old tax regime.

India introduced a new tax regime with lower tax slabs for individuals not claiming deductions or exemptions. Citizens can choose their preferred regime.

Choosing between the old and new tax regimes depends on the taxpayer's earnings and investment structure. The new regime benefits those without deductions, offering lower tax rates. The old regime has over 70 tax exemptions, making it suitable for those heavily invested in deductible instruments.
 

Illustration on Income Tax Calculation (Old vs New Tax Regime)

Assuming an annual income of Rs. 20,00,000 with HRA deduction of Rs. 30,000 and investments in PPF and ELSS to utilise the 80C limit of 1.5 lakhs, along with health insurance purchased for self, spouse and parents, and an NPS investment to utilise Section 80D, the tax calculation for both tax regimes is as follows.

Title

Old Tax Regime (In Rs)

New Tax Regime (In Rs)

Annual Income

20,00.000

20,00,000

(Standard Deduction)

50,000

50,000

(Section 80C)

1,50,000

NIL

(House Rent Allowance)

30,000

NIL

(Health Insurance Premium)

15,000+20,000

NIL

(NPS)

30,000

NIL

Total: Deduction and Exemptions

2,95,000

 

Net Taxable Income

17,05,000

19,50,000

 

Total Tax Payable as per Old Regime

Here is how much tax a person will pay opting for the old tax regime: 

Old Tax Slabs

Old Income Tax Rates

Old Tax in Rs.

Upto Rs 2.5 Lakh

Nil

0

Rs 2.5 Lakh–Rs 5 Lakh

5%

12,500

Rs 5 Lakh–Rs 7.5 Lakh

20%

50,000

Rs 7.5 Lakh-10 Lakh

20%

50,000

Rs 10 Lakh-Rs 12.5 Lakh

30%

75,000

Rs 12.5 Lakh-15 Lakh

30%

75,000

Above Rs 15 Lakh

30%

6,36,000

Total Taxes

8,98,500

Add Higher Education Cess

4%

35,940

Total Payable Tax

9,34,440

 

 

Total Tax Payable as per New Regime (FY 23-24 & AY 24-25)

New Tax Slabs

New Income Tax Rates

New Tax in Rs.

Upto Rs 3 Lakh

Nil

0

Rs 3 Lakh–Rs 6 Lakh

5%

15,000

Rs 6 Lakh–Rs 9 Lakh

10%

30,000

Rs 9 Lakh-12 Lakh

15%

45,000

Rs 12 Lakh-Rs 15 Lakh

20%

60,000

Above Rs 15 Lakh

30%

7,35,000

Total Taxes

8,85,000

Add Higher Education Cess

4%

35,940

Total Payable Tax

9,20,400

 

 

Conclusion

Considering the new vs old tax regime, both have certain advantages and disadvantages. However, you can choose a specific tax regime based on your salary and the structure you use for deductions and exemptions.

The old tax regime might suit individuals who have been earning for several years and now invest for the long term. However, individuals who have recently started to earn and do not want to invest to claim deductions can opt for the new tax regime.
 

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