What is more beneficial, Old Income Tax Regime or New Income Tax Regime?

Income Tax computation is subject to complexities and the choice of old vs new tax regime is a common question raised by various taxpayers. Traditionally, the old income tax regime was followed in India as a method of Income Tax calculations.

However, the budget 2020 introduced a new tax regime for taxpayers to choose from, creating confusion among taxpayers in the choice of the tax regime. Budget 2023 introduced additional changes to the old and new tax regime, inviting more skepticism to the existing taxation system. This blog will provide a comprehensive overview of the old and the new income tax regimes and provide an answer to which regime is better for income tax.

Old Tax Regime

The primary differentiating factor of the old vs new tax regime is that under the old regime, taxpayers are allowed over 70 exemptions and deductions including HRA, LTA, and deductions under Section 80C which can significantly reduce the tax amount.

Some of the most common exemptions and deductions under the old income tax regime are mentioned below,

Section 80C: Deductions up to Rs. 1.5 lakh can be claimed under Section 80C. This includes contributions to the Provident Fund (PF), Public Provident Fund (PPF), Equity-Linked Savings Scheme (ELSS), National Savings Certificate (NSC), and payment of life insurance premiums.

Section 80D: Deductions for premiums paid towards health insurance policies for self, spouse, children, and parents, up to Rs. 25,000 for individuals and Rs. 50,000 for senior citizens.

Section 24(b): Deductions on the interest paid on home loans, capped at a maximum deduction amount of Rs. 2 lakh for self-occupied properties.

Section 10(14): House Rent Allowance (HRA) for salaried individuals can be claimed as a deduction based on certain conditions.

Section 80TTA/80TTB: Deduction on interest earned on savings accounts (up to Rs. 10,000) for individuals and senior citizens.

Under the old income tax regime, the tax slabs are structured in a tiered fashion based on the annual income of an individual.

As of the financial year 2022-23 (AY 2023-24), the tax slabs under the old regime are as follows:

New Tax Regime

The new income tax regime was introduced in the budget 2020, and amended in the budget 2023 making it the default tax system for taxpayers. Under the new tax regime, the tax slabs and rates were altered and changes were made to the exemptions and deductions offered.

In the comparison of old and new tax regimes, taxpayers can not claim exemptions like HRA, LTA, or deductions under Section 80C, 80D, etc under the new regime. However, a standard deduction of Rs. 50,000 along with the following changes have been introduced in the budget 2023 to reduce tax liability under the new tax regime,

Surcharge: The highest surcharge rate has been reduced from 37% to 25% in the new tax regime. This to further result in a reduction of the maximum personal income tax rate to 39%.

Leave Encashment Exemption: The limit for tax exemption on leave encashment on the retirement of non-government salaried employees has been increased to Rs. 25 lakh.

Tax Rebate: The rebate limit of Personal Income Tax has been increased to Rs. 7 lakh from Rs. 5 lakh in the new tax regime.

Family Pension Deduction: Family pension recipients can claim a deduction of ₹15,000 or 1/3rd of the pension, whichever is lower.

Tax Slabs: The tax exemption limit has been increased to ₹3 lakhs, and the new tax slabs have been adjusted for different income levels.

Old Regime vs New Regime

The old and the new tax regimes vary significantly, based on the tax slab and deductions. The old regime lets you reduce your taxable income significantly, while the new regime offers lower tax rates but without most deductions.

Here is a quick overview of the difference between the new vs old tax regimes,

Tax Rates: The new tax regime offers lower tax rates but does not provide the benefit of deductions. Taxpayers need to evaluate whether the lower rates offset the loss of deductions based on their individual financial situations.

Opt-In and Opt-Out: Taxpayers have the flexibility to choose between the old and new regimes each financial year. The decision to opt-in or opt-out should be based on a careful assessment of the impact on overall tax liability.

Ease of Compliance: The new regime simplifies tax calculations by removing the need for complex documentation related to deductions. This results in a more straightforward and streamlined tax filing process.

Cash liquidity: While the new regime offers lower tax rates, the old regime provides more extensive deductions and saving plans for tax planning, potentially impacting liquidity in the long term.

Government's Default: Starting from the financial year 2023-24, the new income tax regime has been set as the default option. Taxpayers who prefer the old regime need to actively choose it during the return filing process.

Which Regime is better for Income Tax?

Based on the tax structure and deductions, it is evident that the old tax regime focuses on long-term savings and investments, whereas the new tax regime adds to the disposable income of individual taxpayers.

The choice between old and new tax regimes depends on the individual objectives of the taxpayers. Taxpayers need to carefully compare the deduction benefits against the tax rates offered in both the new and old tax regimes.

Putting these figures against income can provide a clear picture of favorability and help the taxpayer in deciding which income tax regime to opt for.