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With two tax regimes available now, it is important to know the features of both. Understanding the features of both will help you to choose the best-suited tax regime.
Old Tax Regime
The old tax regime was the only tax regime that existed before the new tax regime was launched in the Budget 2023.
Here are some main features and benefits:
1. Higher tax brackets: Under this regime, a huge portion of your income falls under lower tax rates. This can be beneficial for high-income earners who can leverage these brackets to minimize the overall tax that they have to pay.
2. More Exemptions and deductions: Under the old tax regime, taxpayers are eligible for more than 70 exemptions and deductions, including those for HRA (House Rent Allowance) and LTA (Leave Travel Allowance). These exemptions help in reducing your taxable income and payments. One of the most prominent deductions falls under Section 80C. Here, a taxable income of upto Rs. 1,50,000 can be decreased.
Here is a list of exemptions (Not comprehensive) under the old tax regime
- Leave travel allowance exemption
- House rent allowance exemption
- Children's education allowance exemption
- Entertainment allowance exemption
- Voluntary retirement exemption
- Gratuity exemption
- Leave encashment exemption
- Conveyance allowance for shuttling between home and office
- Prerequisites for official purposes
- Daily allowance
- Transport allowance for specially-abled people
Here is a list of deductions (Not comprehensive) under the old tax regime
- Section 80C: Enables a deduction of up to Rs. 1.5 lakhs on amounts invested in various savings schemes, such as ULIP, EPF, PPF, and ELSS.
- Section 80D: Enables a deduction of up to Rs. 50,000 on medical expenses earned for self, spouse, children, and parents.
- Section 80 TTB: Enables a deduction of up to Rs. 10,000 on interest income accrued from savings accounts and post office deposits.
- House Rent Allowance (HRA): Facilitates a deduction of the exact amount of HRA received or 50% of the basic salary, whichever is lesser.
- Leave Travel Allowance (LTA): Facilitates a deduction of the actual amount of LTA received or 40% of the basic salary, whichever is lower.
- Tax Rebate: You can get a tax rebate on an income of upto Rs. 5 lakhs under section 87A.
- Standard Deduction: Salaried individuals are eligible for a tax deduction of up to Rs. 50,000.
3. A more complex tax filing process: To claim deductions under the old tax regime, you have to maintain receipts and documentation. It also results in a more complex tax filing process. This complexity can be time-consuming and highly prone to errors.
4. Potential for Scrutiny: Due to several exemptions and deductions under the Income Tax Act, a taxpayer’s declaration under the old tax regime will be subject to greater scrutiny from the tax authorities. So, declarations under the old regime will require additional time and effort for justification.
5. LTCG Benefits: The old tax slab regime offers Long-Term Capital Gains (LTCG) benefits on your debt funds investments.
New Tax Regime
Key Features:
1. Lower tax rates under the new tax regime: The new income tax regime (Under Section 115 BAC, which was added to the Income Tax Act 1961) offers lower tax rates for respective taxpayers and HUFS who do not opt for certain deductions or exemptions. This is especially for income brackets under Rs. 15 lakhs. Lower tax rates can lead to decreased tax liability for individuals who fall within these income brackets.
2. Exemptions and Deductions: Initially, when the new tax regime was introduced, there were not many people who wanted to opt for it. This is because those who chose the new system could not claim various deductions and exemptions including HRA, LTA, 80C, 80D, etc. So, to enable more people to opt for the new tax regime, the government announced significant changes to it in the Union Budget 2023. They are as follows:
- Standard deduction: The new tax regime also offers a standard deduction of Rs. 50,000, which was previously available only under the old tax regime. So, this sums up to Rs. 7.5 lakhs of tax-free income under the new regime.
- Family pension deduction: Those who are getting a family pension qualify for a deduction of Rs. 15,000 or 1/3rd of the pension, whichever is less.
- Cut in Surcharge for high networth individuals: The surcharge rate for individuals with income above 5 crores has been slashed from 37% to 25%. This change reduces their effective tax rate from 42.74% to 39%.
- Higher Leave Encashment Exemption: The exemption limit for non-government workers has increased 8 times, from 3 lakhs to 25 lakhs.
3. Increased Tax Rebate Limit: The new tax regime offers a tax rebate for incomes upto Rs. 7 lakhs under Section 87A. The tax rebate was previously Rs. 5 lakhs in the old tax regime.
4. No LTCG: investments in debt mutual funds after March 31, 2023 are not eligible for Long Term Capital Gains taxation on withdrawals.
Old Tax Regime Versus New Tax Regime - A Comparison
1. Tax Slabs
Old Tax Regime | New Tax Regime (Previous) | New Tax Regime (Revised) | Income (Rs) | Tax rate | Income (Rs) | Tax rate | Income (Rs.) | Tax rate (Nil) |
|---|---|---|---|---|---|
Up to 2.5 lakhs | Nil | Up to 2.5 lakhs | Nil | Up to 3 lakhs | Nil |
2.5 to 5 lakhs | 5% | 2.5 to 5 lakhs | 5% | 3 to 6 lakhs | 5% |
5 to 10 lakhs | 20% | 5 to 7.5 lakhs | 10% | 6 to 9 lakhs | 10% |
Above 10 lakhs | 30% | 7.5 to 10 lakhs | 15% | 9 to 12 lakhs | 15% |
10 to 12.5 lakhs | 20% | 12 to 15 lakhs | 20% | ||
12.5 to 15 lakhs | 25% | Above 15 lakhs | 30% | ||
Above 15 lakhs | 30% | ||||
2. Surcharge Rates
Income Range | Surcharge rates for old tax regime | Surcharge rates for new tax regime |
|---|---|---|
Rs. 50 lakhs to 1 crore | 10% | 10% |
Rs. 1 crore to Rs. 2 crores | 15% | 15% |
Rs. 2 crores to Rs. 5 crores | 25% | 25% |
Rs. 5 crores to Rs. 10 crores | 37% | 25% |
Rs. 10 crores and above | 37% | 25% |
3. Exemptions and deductions
(i) - Deductions
Details | Old Tax Regime (FY 2022-23 or 2023-24) | New Tax Regime (FY 2022-23) | New Tax Regime (FY 2023-24) |
|---|---|---|---|
Details | Old Tax Regime (FY 2022-23 or 2023-24) | New Tax Regime (FY 2022-23) | New Tax Regime (FY 2023-24) |
Income eligible for tax rebate | Rs. 5 lakhs | Rs. 5 lakhs | Rs. 7 lakhs |
Maximum amount available for tax rebate | Rs. 12500 | Rs. 12,500 | Rs. 25,000 |
Standard deduction | Rs. 50,000 | Not allowed | Rs. 50,000 |
Interest available on home loans for self-occupied or vacant property under section 24b | Rs. 2 lakhs | Not allowed | Not allowed |
Interest available on home loans coming under Section 24b on let-out property | Allowed according to the interest amount | Allowed according to the interest amount | Allowed according to the interest amount |
Deduction under Section 80C (Investment in LIC, EPF, PPF, Tax Saving FDs etc.) | Rs.1,50,000 | Not allowed | Not allowed |
Employee’s self-contribution to NPS (Section 80CCD(1B)) | Rs. 50,000 | Not allowed | Not allowed |
Employer’s contribution to NPS (Section 80CCD(2)) | Allowed | Allowed | Allowed |
Contributions to Agniveer Corpus Fund – Section 80CCH | The entire amount that has been donated | Did not exist | The entire amount that has been contributed |
Deduction on medical insurance premium under Section 80D | Rs. 25,000 or Rs. 50,000 | Not allowed | Not allowed |
Interest on education loan – deduction under Section 80E | Allowed according to the interest on loan amount | Not allowed | Not allowed |
Interest on electrical vehicle - Deduction coming under Section 80EEB | Allowed according to the interest on loan amount | Not allowed | Not allowed |
Donation to trusts/political parties - Deduction coming under Section 80G | Maximum of 2000 if paid in cash. No restriction on the amount if paid through other means | Not allowed | Not allowed |
Deduction on Savings Bank Account under Section 80TTA/TTB | Rs. 10,000 or Rs. 50,000 | Not allowed | Not allowed |
Deductions to individuals with disabilities coming under Section 80U | Rs. 75000 or Rs. 1,25,000 | Not allowed | Not allowed |
Other deductions | allowed | Not allowed | Not allowed |
(ii) - Exemptions and allowances
Details | Old Tax Regime (FY 2022-23 or 2023-24) | New Tax Regime (FY 2022-23) | New Tax Regime (FY 2023-24) |
|---|---|---|---|
HRA exemption | Allowed | Not allowed | Not allowed |
LTA exemption | Allowed | Not allowed | Not allowed |
Children education allowance | Allowed | Not allowed | Not allowed |
Entertainment allowance | Allowed | Not allowed | Not allowed |
Voluntary retirement exemption | Allowed | Allowed | Allowed |
Gratuity exemption | Allowed | Allowed | Allowed |
Leave encashment exemption | Allowed | Allowed | Allowed |
Conveyance allowance for shuttling between home and office | Allowed | Allowed | Allowed |
Prerequisites for official purposes | Allowed | Allowed | Allowed |
Daily allowance | Allowed | Allowed | Allowed |
Transport allowance for specially-abled persons | Allowed | Allowed | Allowed |
Gifts obtained from employers (Limit: Rs. 5000) | Allowed | Allowed | Allowed |
Old Tax Regime or New Tax Regime - Which One to Choose?
People are often left in a dilemma when they have to choose the tax regime. The new income tax regime has been implemented for those who have a larger number of personal commitments such as repayment of loans, medical treatment of spouse or parents, or do not want to face the difficulty of extensive tax filing. The most important thing is that those who are ineligible for tax deductions like non-salaried taxpayers (Freelancers and consultants) can benefit from choosing this regime. It may also include those who do not get a pension from their employment and thus will not qualify for INR 50,000 standard deduction. On the other hand, senior citizens will get more savings from the old tax regime. Since they get a significant portion of their income from interest, they will benefit by claiming Rs. 50,000 as interest income deduction under Section 80TTB. They will feel more secure under the old tax regime.Here are some common pointers which will help you decide the best-suited regime.
- The new regime will be beneficial when total deductions are lower than 1.5 lakhs.
- When total deductions are more than 3.75 lakhs, the old regime will be advantageous.
- When total deductions are in the range of 1.5 lakhs to 3.75 lakhs, it is determined by your income level.
Ultimately, when deciding which tax regime to choose, it is important to calculate the net taxable income under both regimes and compare the tax liability under both. It is logical to choose the regime with the lower tax liability. It is also important to inform the employer of this choice as appropriate TDS will be deducted from the salary.
FAQs:
1. If I have a salary of 12 lakhs, which tax regime is better?
To determine which tax regime is better, it is important to know the minimum deductions required under the old tax regime to match your tax liability with those under the new tax regime. If you can claim deductions over that minimum amount, the old regime will be a better pick for those earning Rs. 12 lakh per annum.
2. Is there an option to switch between the old and new tax regimes?
Yes, you can switch between the old and new tax regimes at the time of filing your ITR every financial year. Even if you have chosen the new tax regime for TDS throughout the year, you can still easily change the regime while filing your ITR.
Disclaimer:
This page includes information that has been compiled from many sources and is only offered for informational purposes. Since this type of data might change over time, we cannot guarantee that the information supplied or included within it is accurate. It is anticipated that the user would confirm with the relevant source prior to taking any choices or actions.