Old Vs New Tax Regime Which One To Choose

In the Union Budget 2020, the government introduced a new income tax regime. This new regime offers lower tax rates and more slabs, but it does not allow taxpayers to claim exemptions and deductions. This has led to a lot of confusion among taxpayers about which regime they should choose.

We will compare the old and new tax regimes in this article, their advantages and disadvantages, and examples of taxes you need to pay in both cases, so you can take an informed decision.

Old Tax Regime

The old tax regime is the traditional income tax system that has been in place in India for many years. It offers a variety of exemptions and deductions, which can significantly reduce your tax liability. However, the tax rates under the old regime are relatively high.

New Tax Regime

The new tax regime offers lower tax rates and more slabs. There are no exemptions or deductions under the new regime, which means that your tax liability will be higher than it would be under the old regime. However, the new regime is simpler and easier to comply with.

Advantages of the Old Tax Regime

The old tax regime offers a number of advantages, including:

• A variety of exemptions and deductions that can significantly reduce your tax liability.
• The option to choose the most beneficial exemptions and deductions for your individual circumstances.
• A more flexible system that allows you to claim exemptions and deductions that are not available under the new regime.

Exemptions are part of your salary, identified under specific allowance heads that can be considered to be exempt from Income Tax – the eligible amounts are directly taken out when calculating the Taxable income. Examples of exemptions are House Rent Allowance (HRA) and Leave Travel Allowance (LTA). Deductions, on the other hand, allow you to reduce your tax liability by spending on specific items. Example: Section 80C, where you can reduce your total taxable income by up to Rs 1.5 lakh by investing in eligible heads. Apart from this, home loans, health insurance for yourself, your family, and your parents are also considered for deductions.

The Table below gives some of the most common exemptions and deductions that you can avail of.

 

Disadvantages of the Old Tax Regime

The old tax regime also has a number of disadvantages, including:

• Slabs with higher tax rates than the new regime.
• A more complex system that can be difficult to understand and comply with.
• The possibility of missing out on exemptions and deductions that you are entitled to.

Advantages of the New Tax Regime

The new tax regime offers a number of advantages, including:

• Multiple slabs with lower tax rates than the old tax regime.
• A simpler system that is easier to understand and comply with.
• The possibility of paying less tax than you would under the old regime.

Disadvantages of the New Tax Regime

The new tax regime also has a number of disadvantages, including:

• No exemptions or deductions, which means that your tax liability will be higher than it would be under the old regime.
• A less flexible system that does not allow you to choose the most beneficial exemptions and deductions for your individual circumstances.

Which Regime Should You Choose?

The old tax regime has fewer slabs than the new regime. Which tax regime best suits you depends on the nature of your salary terms, the investments you make, and individual circumstances. If you are a high-income earner who is able to claim a lot of exemptions and deductions, then the old tax regime may be the better option for you. However, if you are a low-income earner or if you do not claim a lot of exemptions and deductions, then the new tax regime may be the better option for you.

Here is a comparison between the tax slabs with old and new tax regimes:

 

See the table below which calculates the tax to be paid for someone who earns Rs10,00,000, Rs20,00,000, and Rs.30,00,000 under both these regimes.

 

Please note that the figures mentioned above are approximate and based on the current tax slabs and rates. It is important to keep track of any changes in tax laws and consult a tax professional for accurate calculations.

 

Conclusion

Choosing between the old and new tax regimes requires a careful evaluation of individual financial circumstances and goals. While the old tax regime offers a range of deductions and exemptions, it can be complex and time-consuming. On the other hand, the new tax regime provides simplicity and lower tax rates but may result in the loss of certain deductions. It is essential to evaluate your financial situation, consider the advantages and disadvantages of each regime, and consult with professionals to make an informed decision that maximizes your tax benefits. Remember to stay updated with the latest tax regulations and seek guidance as needed.

FAQs Old Vs New Tax Regime - Which One To Choose

Q1. What is the difference between the old and new tax regimes in India?

A1. The main difference between the old and new tax regimes in India is that the new regime offers lower tax rates and more slabs, but it does not allow taxpayers to claim exemptions and deductions.

Q2. Which tax regime is better for me?

A2. The decision of which tax regime is better for you depends on your individual circumstances. If you are a high-income earner who is able to claim a lot of exemptions and deductions, then the old tax regime may be the better option for you. However, if you are a low-income earner or if you do not claim a lot of exemptions and deductions, then the new tax regime may be the better option for you.

Q3. How do I choose which tax regime to file my taxes under?

A3. In 2023 budget, new regime is identified as the default one. You can choose which tax regime to file your taxes under by submitting Form 10IE to your employer. Form 10IE is a declaration that you are choosing to file your taxes under the new tax regime. You can download Form 10IE from the Income Tax Department website.

Q4. Can I change my mind about which tax regime to file my taxes under?

A4. Yes, you can change your mind about which tax regime to file your taxes under. However, you can only change your mind once in a financial year. If you change your mind after filing your taxes, you will need to file an amended return.

 

Q5. What are the consequences of choosing the wrong tax regime?

A5. If you choose the wrong tax regime, you may end up paying more tax than you should. If you are a high-income earner who is able to claim a lot of exemptions and deductions, then you may end up paying more tax if you choose the new tax regime. However, if you are a low-income earner or if you do not claim a lot of exemptions and deductions, then you may end up paying less tax if you choose the new tax regime.

 

Q6. What are the future prospects of the old and new tax regimes in India?

A6. It is difficult to say what the future prospects of the old and new tax regimes in India are. The government has not yet announced any plans to change the tax regimes. However, it is possible that the government may make changes to the tax regimes in the future.