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Old Vs New Tax Regime: Which One Suits Your Financial Goals Better?

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Old Tax Regime vs New Tax Regime: Who should opt? How is it Beneficial?
April 16, 2024

Table of Content

 

The old vs new tax regime is always a source of headache among taxpayers of a country. And with constant changes, it might get overwhelming to come to a decision.

You need to file your income tax return if you receive income after the deduction of TDS or Tax Deducted at Source. Irrespective of your source of income, you need to know about the old vs new tax regime so you can decide whether to make a switch or not.

New Tax Regime

In the 2020 Union Budget, the Indian government came up with a new tax regime for businesses, individuals and HUFs (Hindu Undivided Families), which differed from the old tax regime.

Later, in the Union Budget 2023, the Indian government revised it and introduced a better tax structure under Section 115 BAC.

Key Features of the New Tax Regime:

Reduced Tax Rates

The new regime comes with reduced tax rates. But it doesn’t allow you to avail certain exemptions and deductions.

Total Income  Slab

(in Rs.)

Income Tax Rates (in % p.a.)

0 - Rs. 3 lakhs

Nil

Rs. 3 lakhs - Rs. 6 lakhs*

5%

Rs. 6 lakhs - Rs. 9 lakhs*

10%

Rs. 9 lakhs - Rs. 12 lakhs

15%

Rs. 12 lakhs - Rs. 15 lakhs

20%

Rs. 15 lakhs and above

30%

* Tax rebate upto Rs 25,000 shall be available if the total income does not exceed Rs 7 lakhs.

Elimination of Most Exemptions and Deductions

Certain exemptions and deductions are not allowed in the new tax regime. A few of them are:

  • Section 80C
  • Section 80CCD (1b)
  • Section 80D
  • Leave travel allowance (LTA)
  • House Rent Allowance (HRA)
  • Deduction for entertainment allowance
  • Deduction for interest payable on home loan
  • Deductions under chapter VIA

Approximately 70 exemptions and deductions are no longer available in the new tax regime.

Simplified Tax Filing

Tax filing,  as per the Income Tax Act of 1961, has been simpler in the new tax regime as there are simpler tax slabs, as mentioned above. It offers a standard deduction for salaried individuals and tax rebates for individuals with incomes of up to 7 lakh rupees.

Rebate and Surcharge Rules

Under New tax regime, Tax rebates have been  extended for those earning an income not exceeding Rs 7 lakhs per annum. Also, the surcharge rates for those earning more than Rs. 5 crores have been lowered to 25% previously, which was 37%.

Impact on High-Income Earners

Those earning more than Rs. 5 crores rupees have to pay a surcharge of 25% in the new tax regime instead of 37% as per the old regime. This will tend to lower the tax rates to 39% (which previously was 42.744%).

Old Tax Regime

The old tax regime is  prevalent since inception.  In this regime, there areapproximately 70 deductions and exemptions available to taxpayers to decrease their tax liability by reducing their taxable income.

Certain deductions and exemptions available under this regime are 80C, HRA, LTA, etc. The taxpayers have a choice between the two regimes for each financial year except for individuals with business income.,

Key Features of the Old Tax Regime:

1. Old Regime Tax Slabs:

Income Tax slabs in the old tax regime are different from the new ones.

Old Tax Total Income Slabs  (Rs. in lakhs)

Old Regime Tax Slab Rates  (in % p.a.)

0 – Rs. 2.5 lakhs

Nil

Rs. 2.5 lakhs – Rs. 5 lakhs

5% (Rebate under Section 87A is available)

Rs. 5 lakhs – Rs.   10 lakhs

20%

Rs. 10  lakhs & above

30%

2. More Tax Deductions and Exemptions:

The old tax regime has around 70 deductions and exemptions to reduce tax liability, such as sections 80C, 10(10D), HRA, LTA, etc.

 3. LTCG Benefits:

Under the old tax regime, you are eligible for long-term capital gains tax savings on making investments, specifically in debt funds.

4. Most Common Exemptions and Deductions Under the Income Tax

The most common exemptions and deductions are in sections 80C, 80D, 80TTB, House Rent Allowance, Leave Travel Allowance, etc.

Exemptions and Deductions Under Old Tax Regime

The exemptions and deductions under the old tax regime include Leave Travel Allowance, standard deduction on salary, House Rent Allowance, deductions under section 80C, child’s education allowance, interest on housing loans, deductions on medical insurance premium payments, investment in NPS, PPF, etc., deduction on contribution towards charities or any political party, etc.

Exemptions and Deductions Under New Tax Regime

There is a standard deduction of Rs 50,000 available from salary and an additional deduction of Rs 15,000 for a family pension. Other benefits include, income from life insurance (subject to conditions), income from agricultural farming, leave encashment on retirement, gratuity received from employer, benefit of commutation of pension under Section 80CCD(2), benefit under Section 80JJA for new employment and a few other benefits.

Difference Between Old Vs New Tax Regime: Which is Better?

The difference between the old and new tax regimes is given below. Let's learn about different tax slabs with respect to the old tax regime vs new tax regime.

Tax slabs (in rupees)

New tax regime

Tax slabs (in rupees)

Old tax regime

0 - 3,00,000

0%

0 - 2,50,000

0%

3,00,00 - 6,00,000

5%

2,50,000 - 5,00,000

5%

6,00,000 - 9,00,000

10%

5,00,000 - 7,50,000

20%

9,00,000 - 12,00,000

15%

7,50,000 - 10,00,000

20%

12,00,000 - 15,00,000

20%

10,00,000 - 12,50,000

30%

15,00,000 & above

30%

12,50,000 - 15,00,000

30%

 

 

15,00,000 & above

30%

To decide between the new vs old tax regime, you must assess your goals, income and, deductions and exemptions before making a switch. If you claim deductions and exemptions exceeding Rs 3.75 lakhs, the old regime might be a better fit for you. However, if you  do not claim deductions and exemptions exceeding Rs.3.75 lakh, the new regime might be better for you. This is because deductions reduce your taxable income, which further reduces your tax liability.

How to Choose Between Old vs New Tax Regime?

  • If your total deductions are less than Rs.1.5 lakh, the new regime might be good for you.
  • If your total deductions exceed Rs. 3.75 lakh, the old tax regime might be right for you.
  • The decision should be made after assessing your goals, income levels, tax slabs and eligibility for deductions and exemptions.

Example of Old vs New Tax Regime

Here’s an example to showcase the difference between new tax regime vs old.

Particulars

Tax under the Old Regime

Tax under the New Regime

(AY 2024-25 onwards)

Salary

Rs. 10,00,000

Rs. 10,00,000

Less: Standard Deduction

Rs. (50,000)

Rs. (50,000)

Taxable Income

 Rs. 9,50,000

9,50,000

Total Tax Liability

(0%*2,50,000) + (5%*2,50,000) + (20%*4,50,000

(0%*3,00,000) + (5%*3,00,000) + (10%*3,00,000)+(15%*50,000)

 

 

= Rs. 1,02,500

= Rs.52,500

 

 

Cess @4%

Rs. 4,900

Rs.2,100

Total Tax, including Cess

Rs.1,27,400

Rs. 54600

The tough choice

Ideally, one should choose the regime that makes them eligible for higher deductions and lower tax payments. For that, let's start at a common point of equal tax liability. Now, if the total deductions and exemptions at your income level are higher, staying in the old regime is profitable. If not, shifting to the new one is a better bet.

Going by calculations,

  • If the total deductions are Rs 1.5 lakh or less, switch to the new tax regime.
  • The old regime is profitable if the total deductions exceed Rs 3.75 lakh per annum.
  • With total deductions in the range of Rs 1.5 lakh – Rs 3.75 lakh, income should be the deciding parameter.

Benefits for comparison

It’s worth noting the respective benefits while comparing tax regimes. The new one will fetch you these advantages.

  • Higher tax rebate limit at Rs 7 lakh per annum.
  • The threshold annual income for exemption increased to Rs 3 lakh.
  • A standard deduction of Rs 50,000 is now available.
  • For incomes above Rs 5 crore per annum, the surcharge rate has been reduced to 25% from 37%, reducing the effective tax rate.
  • The lower of 1/3 of the family pension, or Rs 15000, can be claimed for deduction.
  • Leave encashment exemption limit for non-Govt employees raised to Rs 25 lakh.
  • New tax regime is now the default regime option.

Meanwhile, the old tax regime comes with its usual benefits:

  • More than 70 exemptions and deductions are available
  • Deduction claims include Sec 80C, 80D HRA and LTC.
  • A standard deduction of Rs 50,000 is available.
  • Tax Rebate Limit is Rs 5 lakhs per annum.

Comparisons done. Now, all you need is to make your choice wisely!  

Conclusion On Old Tax Regime Vs New Tax Regime

In simple words, the new tax regime is beneficial for those who wish to avoid the complicated process of tax filings and don’t claim deductions worth more than 1.5 lakhs a year. The old regime is ideal for those who wish to avail themselves of the benefits of exemptions and deductions. Your final choice between old vs new tax regime must depend upon your income levels and goals.

Frequently Asked Questions On Old Tax Regime Vs New Tax Regime

Which is better: old vs new tax regime?

Both the old and new tax regimes have positives and negatives, and your choice must depend upon your goals, income levels and other personal factors. If you're a salaried individual making less than 7 lakhs per annum and are looking for a simple procedure to file for tax benefits, the new regime is best suited for you. However, if you have huge investments, don't have an issue with the complex procedure of filing for tax advantages and are utilising HRA and other deductions, the old regime is for you.

Which tax regime is better for Rs 12 lakhs salary?

If you’re eligible to claim deductions and exemptions exceeding Rs 3 lakh, the old regime might be a better fit for you for a Rs 12 lakh salary. However, if you are not eligible to claim deductions and exemptions exceeding Rs 3 lakh, then the new regime might better fit you.

When can I select the old or new tax regime?

Salaried individuals can submit form 10IEA to employers at the beginning of the financial year to choose a specific tax regime. Other individuals, such as businessmen or professionals, can opt for it when filing their income tax returns , however, they will not be eligible to choose between the two regimes every year.

Which tax regime is better for a 30 lakhs salary?

If you’re eligible to claim deductions and exemptions exceeding Rs.3 lakh, the old regime might be a better fit for you for a Rs.30 lakh salary. However, if you are not eligible to claim deductions and exemptions exceeding Rs. 3 lakh rupees, then the new regime might be a better fit for you. This is because deductions reduce your taxable income, which further reduces your tax liability.

What is the disadvantage of the new tax regime?

Also, Certain exemptions like Section 80C, 80D, HRA, etc are not allowed in the new regime. Moreover, a few deductions, like deductions for home loan interest, life insurance premiums, etc., are not allowed anymore.

Can we claim an 80C deduction in the new tax regime?

It is one of the disadvantages of the new tax regime. You can not claim section 80C deductions in this regime.

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal Vishal Subharwal

Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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#Tax benefits & exemptions are subject to conditions of the Income Tax Act, 1961 and its provisions.

#Tax Laws are subject to change from time to time.

#Customer is requested to seek tax advice from his Chartered Accountant or personal tax advisor with respect to his personal tax liabilities under the Income-tax law.

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