Introduction:

In FY 20-21, the government introduced a new tax regime alongside the existing one, making revisions in the Union Budget 2023. The primary aim of the new regime is to offer taxpayers an option to minimize their tax liability by relinquishing a significant portion of available tax exemptions. However, for many individuals, the old tax regime may prove more advantageous. To determine the preferable tax regime for you, understanding the key distinctions between the old and new tax regimes is essential.

This article highlights key differences, compares pros and cons, demonstrates tax calculation methods, and guides you in choosing the most suitable tax regime. 

Old vs New Tax Regime:

Under the old regime, individuals with income between ₹5 lakh and ₹10 lakh were subject to a 20% tax rate. In the new regime effective from April 1, 2023, income from ₹5 lakh to ₹6 lakh will be taxed at 5%, ₹6 lakh to ₹9 lakh at 10%, and ₹9 lakh to ₹10 lakh at 15%. Additionally, the standard deduction of ₹50,000, previously available only under the old regime, has been extended to the new regime. Lastly, under the new tax  regime, individuals with income up to ₹7.5 lakh won’t have to pay taxes due to the standard deduction and rebate under Section 87A of the Income Tax Act.

The comparison of tax rates under old and new tax  regimes is as follows:

ANNUAL INCOME	OLD TAX REGIME	NEW TAX REGIME
₹0 – ₹2,50,000	Nil	Nil
₹2,50,000  – ₹3,00,000	5%	5%
₹3,00,000 – ₹5,00,000	5%	5%
₹5,00,000 – ₹6,00,000	20%	5%
₹6,00,000 – ₹7,50,000	20%	10%
₹7,50,000 – ₹9,00,000	20%	10%
₹9,00,000 – ₹10,00,000	20%	15%
₹10,00,000 – ₹12,00,000	30%	15%
₹12,00,000 – ₹12,50,000	30%	20%
₹12,50,000 – ₹15,00,000	30%	20%
>₹15,00,000	30%	30%

The table displays the applicable tax rates for individuals aged 60 years or younger and Hindu Undivided Families (HUFs). Senior citizens, falling between the ages of 60 and 80 years, are entitled to a basic tax exemption of ₹3 lakh.

Furthermore, super senior citizens aged 80 and above are entitled to a basic exemption of ₹5 lakh.

Comparing Old and New Tax Structures:

• The new tax regime lacks the tax deduction benefits or exemptions offered by the old regime, except for the standard deduction of ₹50,000, which has been carried over. Consequently, exemptions like those under Section 80C (up to ₹1.5 lakh), home loan interest under Section 24B (up to ₹2 lakh), and medical insurance under Section 80D (up to ₹1 lakh), among others, do not apply in the new regime.

• During her Union Budget 2023 speech, the Finance Minister announced the expansion of tax slabs to six in the new regime, accompanied by a reduction in applicable tax rates to 0%, 5%, 10%, 15%, 20%, and 30% for income up to ₹15 lakh. Individuals earning more than ₹15 lakh will maintain the existing 30% tax slab rate under both tax regimes.

• In the old regime, you are exempt from paying taxes if your income is below ₹5 lakh, whereas, under the new regime, incorporating the newly-introduced standard deduction of ₹50,000, your tax obligation becomes nil if your income is less than ₹7.5 lakh.

New Tax Regime

 Deductions and Exemptions:

• The family pensioners earning income under the head ‘Income from Other Sources’ can avail a standard deduction of ₹15,000.

• Contributions made to the Agniveer Corpus Fund are eligible for tax deduction benefits under the newly-introduced Section 80CCH of the Income Tax Act.

• Salaried individuals and pensioners earning their income under the head ‘Income from Salaries’ are entitled to a standard deduction of ₹50,000.

• Tax deduction benefits are applicable to the employer’s NPS contribution to the employee’s NPS account under Section 80CCD(2). The maximum benefit should not exceed 10% of the basic salary plus dearness allowance for private sector employees and 14% for government employees.

  Advantages:

• The reduced tax liability under the new regime could result in increased disposable income.

• Eligible taxpayers with an income up to ₹7.5 lakh are exempt from income tax.

• The decreased tax slab rates in the new regime may lead to a reduction in the tax outgo for specific taxpayers.

• The new regime brings about a significant reduction in tax compliance.

• The new regime grants taxpayers greater flexibility to invest and secure insurance based on their return expectations, risk tolerance, and liquidity needs, without being constrained by tax-saving objectives.

 Limitations: 

• Certain taxpayers who maximize tax exemptions under the old regime might face a higher final tax obligation.

• A substantial number of tax exemptions are not applicable under the new regime, which could potentially discourage certain taxpayers from engaging in investments and insurance.

• Business people may find the new tax regime less flexible.

• No tax rate concessions apply to income exceeding ₹15 lakh under the new regime.

Old Tax Regime

Deductions and Exemptions:

• Deductions on interest from savings account deposits are applicable under Section 80TTA /TTB.

• Exemptions specified under Section 10(14).

• Tax deduction of ₹15,000 for family pension is applicable under Section 57, Clause (iia).

• Government employees can claim deductions for professional tax and entertainment allowance.

• Deductions on the interest component of a home loan for a vacant or self-occupied property are applicable as per Section 24.

• Tax deductions under Chapter VI-A of the Income Tax Act, including Section 80C, 80D, and 80G, provide various avenues for reducing taxable income.

 Advantages:

• Some tax exemptions, such as those on life insurance and health insurance premiums, serve as incentives for individuals to purchase and maintain insurance, contributing to the financial security of both the taxpayers and their dependents.

• For certain taxpayers who typically maximize tax deduction benefits, the final tax obligation under the old regime may be lower than that under the new regime.

• The old tax regime offers nearly 70 tax deduction benefits and rebates.

• Various tax exemptions are also applicable to eligible investment instruments such as equity-linked savings schemes, Public Provident Fund, National Pension System, Tax-saver FDs, etc., up to ₹1.5 lakh under Section 80C. These exemptions can assist taxpayers in mitigating the impact of inflation and accomplishing their long-term financial objectives.

 Limitations:

• A higher tax outgo under the old regime may result in reduced disposable income.

• The majority of investments eligible for tax exemptions under the old regime have extended lock-in periods.

• The old regime imposes higher tax slab rates across multiple brackets, applicable up to ₹15 lakh.

Choosing Between the Old and New Tax Regimes:

The fundamental distinction between the two regimes lies in one having lower tax rates, while the other offers substantial exemptions and deductions that significantly reduce taxable income. Therefore, it is advisable to calculate taxes under both regimes and determine which one offers better benefits.

Make sure to input all your current and planned tax-saving measures, including deductions and exemptions, as well as your gross annual income, income from other sources, rental income, HRA, etc., to obtain accurate results. After obtaining both sets of results, you can make an informed decision by choosing the regime where your tax obligation would be lower.

Conclusion: 

Both the old and new tax regimes have pros and cons. The old system encourages saving habits, while the new one benefits lower-earning employees with fewer deductions and exemptions. The new system is deemed safer and simpler, reducing the risk of tax evasion fraud. However, individual circumstances warrant a detailed comparison to determine the optimal fit.