New Tax Regime vs. Old Tax Regime: Which One Should You Choose?

New Tax Regime vs. Old Tax Regime. The Indian government introduced a new optional tax regime in Budget 2020 to simplify the income tax system and provide relief to taxpayers. This new tax structure offers lower tax rates but removes most of the exemptions and deductions available under the old tax regime. In Budget 2023, the new tax regime was made the default option, though taxpayers can still choose between the two systems.

As the new financial year 2023-24 begins, salaried individuals are faced with the crucial decision of whether to continue with the old tax regime or switch to the new one.

Let’s take an in-depth look at the key differences between the two tax regimes to help you make an informed choice.

Also Read-Income Tax Slabs and Rates in India for FY 2023-24 and FY 2024-25

Overview of the New Tax Regime.

Under the new tax regime, the income tax slabs have been revised to offer lower tax rates. Here are the tax rates applicable for the financial year 2023-24:

• Income up to Rs. 3 lakhs: Nil
• Rs. 3 lakhs to Rs. 6 lakhs: 5%
• Rs. 6 lakhs to Rs. 9 lakhs: 10%
• Rs. 9 lakhs to Rs. 12 lakhs: 15%
• Rs. 12 lakhs to Rs. 15 lakhs: 20%
• Above Rs. 15 lakhs: 30%

The basic exemption limit has been increased from Rs. 2.5 lakhs to Rs. 3 lakhs. Taxpayers with income up to Rs. 7 lakhs will not have to pay any tax, as they are eligible for a rebate under Section 87A. The standard deduction of Rs. 50,000 for salaried individuals is available under the new regime as well.

However, the catch is that over 70 exemptions and deductions have been removed under the new tax structure. This includes commonly claimed deductions such as:

• Section 80C investments (PPF, ELSS, life insurance premium, etc.)
• House Rent Allowance (HRA)
• Leave Travel Allowance (LTA)
• Home loan interest
• Medical insurance premium (Section 80D)
• Donations (Section 80G)

The only deductions still allowed under the new regime are employer’s contribution to NPS under Section 80CCD(2) and for new employment under Section 80JJAA.

Comparing with the Old Tax Regime.

In contrast, the old tax regime has just three income slabs with higher tax rates but allows for a wide range of exemptions and deductions. The tax rates under the old system are:

• Income up to Rs. 2.5 lakhs: Nil
• Rs. 2.5 lakhs to Rs. 5 lakhs: 5%
• Rs. 5 lakhs to Rs. 10 lakhs: 20%
• Above Rs. 10 lakhs: 30%

Taxpayers can reduce their taxable income significantly by claiming deductions on investments and expenses such as:

• Section 80C investments up to Rs. 1.5 lakhs
• Additional NPS contribution up to Rs. 50,000 under Section 80CCD(1B)
• Health insurance premium up to Rs. 25,000 for self and family, Rs. 50,000 for senior citizen parents under Section 80D
• Home loan principal repayment and interest up to Rs. 3.5 lakhs under Sections 80C and 24
• Donations to charitable institutions under Section 80G
• Interest on education loan under Section 80E

Salaried individuals can also claim HRA and LTA benefits based on actual rent paid and travel bills. The standard deduction of Rs. 50,000 is available under the old regime too.

Comparison Table: New Tax Regime vs. Old Tax Regime

Factors to Consider While Choosing Between the Two Regimes.

1. Income Level and Tax Liability.

Your income level is the primary factor that determines which tax regime would be more beneficial. In general, the new tax structure favors those in the lower and middle income brackets who do not claim many deductions.

For instance, consider a salaried individual with a gross total income of Rs. 8 lakhs and no tax-saving investments. Under the new regime, his tax liability would be Rs. 33,800, while under the old regime it would be Rs. 85,800 (including 4% cess) after standard deduction. So the new system helps save Rs. 52,000 in taxes.

However, if the same person invests Rs. 1.5 lakhs under Section 80C and pays a health insurance premium of Rs. 25,000, his tax under the old regime drops to Rs. 46,800. In this case, the old structure proves more beneficial.

As income increases, the difference between the tax liabilities under the two regimes narrows if no deductions are claimed. But the old regime allows for higher tax savings on the same level of investments and expenses at higher income levels.

2. Investment Goals and Habits.

Your current investment portfolio and future financial goals should also guide your choice of tax regime. If you are already investing in tax-saving options like PPF, ELSS, NPS, life insurance etc. for retirement planning or other targets, it makes sense to continue with the old system to avail deductions.

Switching to the new regime would mean foregoing the tax benefits on these investments. Additionally, some of these have long lock-in periods, so exiting prematurely could result in losses. The old system incentivizes taxpayers to save and invest for the long term.

On the other hand, if you prefer more flexibility and liquidity in your investments, the new regime may suit you better. By paying slightly higher tax, you can invest the surplus in high-return options as per your risk appetite and redeem easily when needed.

3. Availing Home Loan Benefits.

One of the biggest tax benefits under the old regime is on home loans. Borrowers can claim deduction on the principal repayment up to Rs. 1.5 lakhs under Section 80C, and on the interest paid up to Rs. 2 lakhs under Section 24 for a self-occupied property.

First-time homebuyers can avail an additional Rs. 1.5 lakh deduction on interest under Section 80EEA, taking the total tax savings to Rs. 5 lakhs. For an affordable housing loan, this can significantly reduce the effective interest cost.

Since these deductions are not available under the new regime, those servicing a home loan, especially in the initial years when interest forms a major chunk of EMIs, should preferably opt for the old system.

4. Residential Status and Allowances.

Salaried individuals who live on rent can claim HRA exemption under the old regime, based on the actual rent paid, salary and city of residence. Those staying in metros with high rent can save a substantial amount in taxes. The new regime does not offer this benefit.

Similarly, LTA exemption can be availed twice in a block of four years under the old system. Those who undertake domestic travel regularly for leisure or business can reduce their tax outgo by submitting bills.

The standard deduction of Rs. 50,000 is available under both regimes. But the professional tax paid is not deductible under the new structure.

5. Ease of Compliance and Documentation.

The new tax regime scores high on simplicity and ease of filing returns. With fewer deductions and exemptions to claim, taxpayers need not worry about submitting a plethora of documents as proof of investments.

The old system requires more effort in terms of record-keeping and tax planning to maximize benefits under various sections. Those with limited knowledge may need to seek professional advice, adding to the compliance cost.

However, the government has been working on pre-filling ITR forms with details of income and taxes already available in the database. This should reduce the burden of compliance for taxpayers in both regimes.

Practical Examples and Case Studies.

To further illustrate the impact of choosing between the old and new tax regimes, let’s consider some practical examples and case studies:

1. Case Study 1: Young Professional with Minimal Investments.
   • Profile: A 25-year-old software engineer with an annual income of ₹8 lakh and minimal tax-saving investments.
   • Old Regime: The taxable income after standard deduction (₹50,000) and minimal investments (₹50,000) would be ₹7 lakh. The tax liability would be ₹52,500.
   • New Regime: The taxable income after standard deduction (₹50,000) would be ₹7.5 lakh. The tax liability would be ₹37,500.
   • Conclusion: The new tax regime is more beneficial for this individual due to the lower tax liability and simpler tax calculation process.
2. Case Study 2: Middle-Aged Professional with Significant Investments.
   • Profile: A 40-year-old marketing manager with an annual income of ₹15 lakh and significant tax-saving investments (₹3 lakh).
   • Old Regime: The taxable income after standard deduction (₹50,000) and investments (₹3 lakh) would be ₹11.5 lakh. The tax liability would be ₹1,42,500.
   • New Regime: The taxable income after standard deduction (₹50,000) would be ₹14.5 lakh. The tax liability would be ₹1,95,000.
   • Conclusion: The old tax regime is more beneficial for this individual due to the higher tax-saving investments and lower tax liability.
3. Case Study 3: Senior Citizen with Pension Income.
   • Profile: A 65-year-old retired individual with an annual pension income of ₹6 lakh and no significant tax-saving investments.
   • Old Regime: The taxable income after standard deduction (₹50,000) would be ₹5.5 lakh. The tax liability would be ₹12,500.
   • New Regime: The taxable income after standard deduction (₹50,000) would be ₹5.5 lakh. The tax liability would be ₹12,500.
   • Conclusion: Both regimes result in the same tax liability for this individual. However, the new tax regime offers a simpler tax calculation process.

Verdict: Making an Informed Choice.

As seen above, there is no one-size-fits-all answer to the question of whether to opt for the new or old tax regime. The choice depends on a combination of factors such as income level, investment habits, financial goals, and residential status.

In general, the new tax structure benefits those with income up to Rs. 15 lakhs who make minimal tax-saving investments and do not avail of many exemptions. The tax savings can be significant for this segment compared to the old regime.

On the other hand, the old system still works better for high-income earners who invest heavily in 80C options, claim home loan benefits and have a higher risk appetite. The deductions can help bring down the effective tax rate and create a corpus for long-term goals.

Ultimately, it is advisable to calculate your total tax liability under both regimes, factoring in all incomes, deductions and exemptions, before deciding which one to opt for. Take the help of an online income tax calculator or consult a tax expert if needed.

Remember, you can switch between the two regimes every year based on changes in your income and investment situation. However, once you opt for the new regime for a particular year, you cannot claim any of the exemptions and deductions available under the old system for that year.

Also, taxpayers with business income can opt for the new regime only once, and cannot switch back to the old structure in subsequent years. So consider the long-term implications before making the shift.

In Conclusion, the introduction of the new tax regime has provided taxpayers with greater flexibility and choice in managing their finances. By weighing the pros and cons of both systems vis-à-vis your individual circumstances, you can make an informed decision that optimizes your tax savings and aligns with your financial goals.

The government’s aim of simplifying the tax structure and reducing compliance burden is laudable. However, it remains to be seen whether the new regime will gain wider acceptance among taxpayers in the coming years, or if further tweaks will be needed to make it more attractive.

Regardless of the tax regime you choose, the importance of financial planning and disciplined investing cannot be overstated. By starting early, diversifying across asset classes and staying the course despite market volatility, you can create wealth and achieve your milestones in a tax-efficient manner.

C.K. Gupta

Hello, I am C.K. Gupta Founder of Taxgst.in, a seasoned finance professional with a Master of Commerce degree and over 20 years of experience in accounting and finance. My extensive career has been dedicated to mastering the intricacies of financial management, tax consultancy, and strategic planning. Throughout my professional journey, I have honed my skills in financial analysis, tax planning, and compliance, ensuring that all practices adhere to the latest financial regulations. My expertise also extends to auditing, where I focus on maintaining accuracy and integrity in financial reporting. I am passionate about using my knowledge to provide insightful and reliable financial advice, helping businesses optimize their financial strategies and achieve their economic goals. At Taxgst.in, I aim to share valuable insights that assist our readers in navigating the complex world of taxes and finance with ease.