Comparison of New Tax Regime vs Old Tax Regime
22 February, 2023
The government of India announced the new income tax regime in Budget 2020, which became an option for taxpayers from FY2021. However, its adoption remained low. In the Union Budget 2023, Finance Minister Nirmala Sitharaman announced a major tweak to the new tax regime to encourage more adoption. These changes will come into effect for the financial year that falls between April 2023 and March 2024 (FY2023-24, or simply FY24), which also translates to assessment year (AY) 2024-25.
In fact, the new tax regime has been selected as a default option for all taxpayers from FY24 onwards, and taxpayers who want to opt for the old tax regime will now have to specifically indicate this preference.
So, what is the new tax regime, what are the changes made to it, and how does it now stack up versus the old tax regime?
And now that the government has tried to level the playing field between the old tax regime and new tax regime, which one you should opt for? Here's what you need to know.
The New Tax Regime
The new tax regime offers six tax slabs, with zero tax for income up to ₹3 lakh, and a tax rate rising by 5 percentage points for incremental income of ₹3 lakh each.
Up to ₹ 3,00,000
From ₹ 3,00,001 to ₹ 6,00,000
From ₹ 6,00,001 to ₹ 9,00,000
From ₹ 9,00,001 to ₹ 12,00,000
From ₹ 12,00,001 to ₹ 15,00,000
Above ₹ 15,00,000
Additionally, the above tax slabs are applicable for those with taxable income above ₹ 7 lakh. There will be no tax for those with taxable income below ₹ 7 lakh, as per the latest announcement in Union Budget 2023.
Income tax is levied in incremental slabs. This means that if a person earns ₹10 lakh, they will not be charged a flat 15% rate (as indicated in the table above) on the entire income. In the tax calculation, their income up to ₹3 lakh will attract zero tax, while the income between Rs 3 lakh and 6 lakh will be charged 5% (i.e., 5% of Rs 3 lakh = Rs 15,000); income between ₹ 6 lakh and ₹ 9 lakh will attract 10% tax (₹ 30,000) while the remainder ₹ 1 lakh that makes up the income will attract 15% tax rate (₹ 15,000), bringing the total tax outgo to ₹ 60,000.
Much like before, the new tax regime comes with one condition. Unlike those who opt for the old tax regime, the new tax regime does not allow taxpayers to claim common exceptions. This is discussed in the article later. However, the FM did announce that salaried taxpayers can remove an additional ₹ 50,000 from their income as a standard deduction for tax calculations.
The Old Tax Regime
The income tax slabs were not tweaked for the old tax regime for FY24 and remain as below.
Up to ₹ 2,50,000
₹ 2,50,000 to ₹ 5,00,000
₹ 5,00,000 to ₹ 10,00,000
Above ₹ 10 lakh
However, opting for old tax regime allows you to claim a long list of exemptions, some of which are listed below:
Exemption of income up to ₹ 1.5 lakh under Section 80C of the Income Tax Act. This allows in pension funds (EPF, PPF), select mutual funds (ELSS), ULIPs, tax saving fixed deposits or other saving schemes such as National Savings Certificate, Sukanya Samriddhi Yojana, Senior Citizens Savings Scheme etc. Spending on life insurance, principal repayment made towards home loan or tuition fee for child can also be considered for exemption under Section 80C.
An additional ₹ 50,000 invested in NPS can be removed from taxable income under Section 80CCD.
Other tax benefits such as spending on health insurance for self and parents can be claimed as an exemption under Section 80D.
Other benefits include leave Travel Allowance, House rent allowance depending upon salary structure and rent paid, besides a host of other exemptions can also be claimed in the old tax regime.
Old Tax Regime vs New Tax Regime: Which One Should You Choose?
The changes announced for FY24 make the new tax regime a compelling option for two sets of people. It is an obvious choice for those with income below ₹ 7 lakh (or ₹ 7.5 lakh for those with salary income as they avail an additional ₹ 50,000 as Standard Deduction).
Even for those with higher incomes, the new tax regime may make sense for taxpayers who cannot claim a lot of exemptions because they cannot invest or spend to maximise the benefits offered under Section 80C/Section 80D, or because they don’t have home loan repayment or do not stay on rent.
Here is how you could decide whether you should choose the new tax regime or old tax regime.
If you can claim a tax benefit of about 40% of your annual income or ₹ 4.5 lakh (whichever is lower) between Section 80C, Section 80D, house rent, home loan repayment as well as any other exemption allowed (under old tax regime), you could opt for the old tax regime.
Here is calculation illustrated with an example of a person with income of ₹ 12 lakh.
₹ 12 lakh salary: Old tax regime tax payout with exemption benefit claimed
₹ 12 lakh salary: New tax regime tax payout
₹ 12 lakh salary under old tax regime with ₹ 4.5 lakh income removed from calculation after ₹1.5 lakh investment under Section 80C, ₹ 50,000 in NPS and ₹ 2.5 lakh claimed under house rent exemption
Exemptions under new tax regime
While the old tax regime continues to enjoy a slew of benefits, certain kinds of income received continue to remain exempted in both the old and new tax regimes. These are:
Interest received on Post Office Savings Account under Section 10(15)(i) the maximum amount of ₹ 3,500.
Gratuity received from employer up to a maximum amount of ₹ 20 lakh.
Amount received from Life Insurance Policy on maturity under Section 10(10D).
Employer contribution in NPS or EPF up to 12% of salary and interest on EPF up to 9.5% p.a.
Income from Life Insurance.
Income from agricultural farming.
Standard reduction on rent.
Leave encashment on retirement.
VRS proceeds up to ₹ 5 lakh.
Retirement cum death benefit.
Money received as a scholarship for education.
Interest and maturity amount of PPF or Sukanya Samriddhi Yojna.
Commutation of Pension. The new tax regime offers you to claim deductions u/s 80CCD(2) (employers contribution in notified pension scheme) and 80JJAA (for new employment).
New tax regime: Pros and cons
The new tax regime makes sense for this with income up to ₹ 7 lakh, or for those with higher incomes who cannot claim tax benefits of at least ₹ 4.5 lakh.
Tax calculation under new tax regime is simpler.
Operating under the new tax regime makes life simpler for the taxpayer as they do not have to worry about keeping records of their exemption claims.
Those who claim high amount of exemptions are better off in old tax regime
New tax regime makes no effort to incentivise taxpayers to save, such as in ELSS or PPF schemes.
Whether the old tax vs the new tax regime is suitable for you will only be put to the test when you input your earnings in both the regimes to know the exact tax payable. To learn more about income tax payable by you, HDFC Bank offers an income tax calculator to bring to you ease of calculations.
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*Terms and conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. You are recommended to obtain specific professional advice from before you take any/refrain from any action. Tax benefits are subject to changes in tax laws. Please contact your tax consultant for an exact calculation of your tax liabilities.