Difference Between Old Vs New Tax Regime: Which is Better?
Difference Between Old Vs New Tax Regime: Which is Better?
In India, filing taxes involves making a basic yet crucial decision on whether to opt for the new tax regime or continue with the old one. Both have their pros and cons, and the better choice depends on your individual circumstances. This article will guide you through the key differences between these two regimes to help you decide which one minimises your tax burden.
The old tax regime offers various exemptions and deductions that can substantially reduce your taxable income. However, it comes with a more complex filing process.
The new tax regime, introduced in 2020, boasts lower tax rates but eliminates most of those deductions and exemptions. It offers a simpler filing process but might not always result in lower taxes.
Understanding these key features and differences between old and new tax regimes will equip you to make an informed decision about which regime is best for you.
The New Tax Regime – An Overview
As stated earlier, introduced in 2020, the new tax regime in India offers a simplified approach to tax filing. This regime offers lower tax rates compared to the old regime.
Income slabs are defined, and each slab has a specific tax rate. For example, for the financial year 2023-24 (the assessment year 2024-25), there is no tax on income up to ₹3 lakhs, 5% tax on income between ₹3-6 lakh, and so on.
However, unlike the old regime, the new regime eliminates most deductions and exemptions for expenses like medical bills, housing loan interest (beyond ₹2 lakh on self-occupied property), travel allowances, and investments under sections like 80C and 80D.
The new regime offers a simplified approach with potentially lower taxes for some. However, it is crucial to compare it to the old regime based on your specific financial situation to make an informed decision.
The government introduced 5 key changes in Budget 2023 to make the new tax regime more attractive (applicable for FY 2023-24 and 2024-25):
Default Regime: Now, it is the default option. This means that unless you specifically opt out and switch to the old regime, your income will be taxed under the new regime's structure. This could potentially benefit some taxpayers who might not have been aware of the new regime or its advantages.
Simpler Tax Brackets: The old tax regime has multiple tax slabs with different rates. The new tax regime slabs offer a more streamlined structure with fewer tax brackets. This can simplify tax calculations and potentially reduce confusion when determining your tax liability.
| Annual Income | Tax Rate |
|---|---|
| Up to ₹3 lakhs | Nil |
| ₹3 – ₹6 lakh | 5% (Tax rebate u/s 87A) |
| ₹6 – ₹9 lakh | 10% (Tax rebate u/s 87A up to ₹7 lakh) |
| ₹9 - ₹12 lakh | 15% |
| ₹12 - ₹15 lakh | 20% |
| ₹15 Lakh and above | 30% |
Reduced Surcharge for High Earners: The new regime offers a benefit for high earners (those with income above ₹5 crore) by reducing the highest surcharge rate from 37% to 25%. This can potentially lower their overall tax burden compared to the old regime.
Introduction of Standard Deduction: A standard deduction of ₹50,000 has been introduced to replace most deductions claimed under the old regime. This simplifies filing but may not benefit those with higher deductions.
Increased Basic Exemption Limit and Rebate: The basic exemption limit, the minimum income not taxed, has been raised to ₹3 lakh from ₹2.5 lakh. Additionally, a tax rebate of ₹25,000 applies to income up to ₹7 lakh, effectively resulting in no tax for individuals in this bracket.
New Tax Regime Offers Limited Exemptions
The new tax regime introduced in India focuses on lower tax rates and a simpler filing process. This comes at the cost of eliminating most exemptions available under the old regime.
Let us clarify the status of a few important exempts and non-exempts under this regime:
Income from Life Insurance (Not Exempt): Maturity proceeds from most life insurance policies are taxable under the new regime. However, there are exceptions for certain types of policies like term insurance or policies with premiums not exceeding 10% of the sum assured.
Agricultural Income (Exempt): Agricultural income remains exempt from tax under both the new and old regimes.
Standard Reduction on Rent (HRA) (Not Exempt - Replaced by Standard Deduction): The new regime does not offer a separate deduction for house rent allowance.
Retrenchment Compensation and Leave Encashment on Retirement (Not Exempt): Payments received as compensation for retrenchment and leave encashment on retirement are taxable under the new regime.
VRS Proceeds up to ₹5 lakhs (Not Exempt): Voluntary Retirement Scheme (VRS) proceeds are generally taxable under the new regime. However, there might be partial exemption for a specific amount depending on the terms of the VRS package.
Death cum Retirement Benefit (Not Exempt): The new regime generally taxes death cum retirement benefits. Exceptions might exist for specific benefits from employers based on their terms and conditions.
Money Obtained as a Scholarship for Education, etc. (Exempt): Scholarships granted by a government, university, or other approved institutions for pursuing full-time education remain exempt from tax under the new regime.
The Old Tax Regime – An Overview
The old tax regime, also known as the regular regime, offers a more traditional approach to tax filing in India. While it involves a slightly more complex process compared to the new regime, it can be beneficial for certain taxpayers due to the various deductions and exemptions available.
The old tax regime slab has a progressive tax structure with more tax brackets compared to the new regime. Tax rates increase as your income rises, ensuring those with higher incomes contribute a larger share. Below are the tax rates for FY 2024-25 (AY 2025-26)
| Income Range | Tax Rate (for individuals aged less than 60 years) |
|---|---|
| Up to ₹2.5 lakhs | Nil |
| ₹2.5 lakhs to ₹5 lakhs | 5% |
| ₹5 lakhs to ₹10 lakhs | 20% |
| ₹10 lakhs to ₹15 lakhs | 30% |
| ₹15 lakhs to ₹20 lakhs | 30% |
| Above ₹20 lakhs | 30% |
Section 80C: This allows deductions for investments up to ₹1.5 lakh in a financial year in instruments like Public Provident Fund (PPF), Employee Provident Fund (EPF), Unit Linked Insurance Plans (ULIPs), etc.
House Rent Allowance (HRA): Salaried individuals can claim a deduction for rent paid, subject to certain limits.
Leave Travel Allowance (LTA): This allows salaried individuals to deduct travel expenses for themselves and their families.
Section 80D: Deductions can be claimed for medical insurance policy premiums paid for yourself, spouse, parents, and dependent children.
Exploring Tax Management Strategies in the Old Tax Regime
The old tax regime presents a complex landscape for some taxpayers, characterised by higher tax rates compared to the new regime. However, amidst its intricacies, it offers a plethora of avenues for reducing tax liabilities.
In recent years, the array of exemptions and deductions available under the Old Regime has expanded significantly, providing taxpayers over 70 options to mitigate their taxable income.
Exemptions, integral components of one's salary, such as House Rent Allowance (HRA) and Leave Travel Allowance (LTA), serve as prime examples. Conversely, deductions enable taxpayers to decrease their tax burden through investments, savings, or specific expenditures.
Notably, Section 80C allows for a reduction of taxable income by up to ₹1.5 lakhs. Furthermore, tax savings opportunities abound when undertaking activities like acquiring a home loan or purchasing a health insurance plan for oneself, family members, and parents.
Also Read: Health Insurance Tax Benefits
Comparing Old vs. New Regime Based on Deductions
When deciding between the old and new tax regimes, it is crucial to evaluate your financial goals, income, and potential deductions and exemptions. If your claimed deductions and exemptions exceed ₹3.75 lakhs, the old regime may be more advantageous.
Conversely, if your claimed deductions and exemptions fall below ₹3.75 lakhs, the new regime might offer greater benefits. Deductions significantly reduce taxable income, thereby minimising your overall tax liability.
Income Tax Old Regime vs New Regime: An Example
Let us consider Rahul, a salaried individual, with the following details for the financial year 2023-24:
Salary: ₹10 lakh
Investments (deductible under Section 80C): ₹1.5 lakhs (PPF, Equity Linked Savings Scheme)
House Rent Allowance (HRA): ₹2 lakhs
Medical Insurance Premium (deductible under Section 80D): ₹50,000 for self and parents
We will calculate his tax liability under the old and new regimes to see which one is more suitable for him.
Old Tax Regime Calculation:
| Particulars | Old Regime | New Regime |
|---|---|---|
| Gross Annual Income | ₹10 lakhs | ₹10 lakhs |
| Standard Deduction | (₹50,000) | (₹50,000) |
| Deductions | ||
| Section 80C | ₹1.5 lakhs | - |
| HRA (assumed to be fully exempt) | ₹2 lakhs | - |
| Medical Insurance (Section 80D) | ₹50,000 | - |
| Total Deductions | (₹4.5 lakhs) | (₹50,000) |
| Taxable Income | ₹5.5 lakhs | ₹9.5 lakhs |
| Tax Liability (as per tax slabs) | Since the taxable income falls under the 20% tax bracket (₹5 lakhs to ₹10 lakhs), the tax liability will be approximately | Since the taxable income falls under the 15% tax bracket (₹7 lakhs to ₹10 lakhs), the tax liability will be approximately |
| = ₹23,500 | = ₹52,500 |
Also Read: Health Insurance Calculator
Which One is Better - Old vs New Tax Regime Comparison
Are you feeling overwhelmed by tax filing complexity? The new tax regime might be your answer! It offers a simpler process with potentially lower tax rates, but there is a catch - you miss out on most deductions and exemptions.
On the other hand, the old regime allows you to claim these benefits, potentially further lowering your tax burden. However, it requires more paperwork. So, if you have minimal deductions, less than ₹1.5 lakhs annually, and prioritise a hassle-free experience, the new regime is a good fit.
But if you have significant deductions and do not mind the extra paperwork, the old regime could save you more money. Ultimately, the best choice depends on your income level and financial goals. Consider consulting a tax advisor for personalised advice.
Conclusion
Choosing the right tax regime requires careful analysis. Consider your income structure, potential deductions, investment plans, and comfort level with record keeping. Utilise online tax calculators or consult a tax professional to determine which regime minimises your tax liability.
Disclaimer / TnC
Your policy is subjected to terms and conditions & inclusions and exclusions mentioned in your policy wording. Please go through the documents carefully.
I invest heavily in tax-saving instruments. What should I do?
I invest heavily in tax-saving instruments. What should I do?
The old tax regime might be more beneficial for you. It allows deductions to be claimed under sections like 80C (investments in PPF, ELSS, etc.), which can significantly reduce your taxable income. However, the filing process can be more complex due to the calculations and record-keeping involved.
How can I decide which regime is better for me?
The best regime depends on your individual circumstances. Consider your income structure, potential deductions (investments, medical insurance etc.), and comfort level with record keeping. You can also use online tax calculators or consult a tax professional to compare your tax liability under both regimes and choose the one that minimises your tax burden.
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