Old Tax Regime Vs New Tax Regime - Which is Better For You?

The first budget of the ‘Amrit Kaal’ gave the middle class a reason to cheer. In a series of big announcements made by the finance minister, one (revised tax slabs) stood out the most for obvious reasons. A lot has changed on the tax front, leaving taxpayers with additional money in their pockets. As taxpayers, it is important that you understand the new tax regime and how it is different from the old tax regime. Read to find out how you can save income tax on salary using new and old tax regimes and which is the best for you.

New Tax Regime As Per Budget 2023

The new tax regime was first introduced in 2020, but the old tax regime was still the default tax regime. However, the union budget for 2023 made the new regime the default tax regime and gave more incentives to promote it.

For example, the standard deduction of Rs 50,000 has been introduced to the new regime, which was only available under the old regime.

The new tax regime has been made simpler and has six tax slabs against seven. The minimum exemption limit was also increased from Rs 2.5 lakhs to Rs 3 lakhs. Following are the income slabs and their respective tax rates under the simplified new regime.

Benefits of New Tax Regime 2023

1. Minimum exemption: The minimum exemption limit has been increased to Rs 3 lakhs from 2.5 lakhs under the new regime.
2. Tax rebate: The tax rebate limit under section 87A has been increased from Rs 5 lakhs to Rs 7 lakhs under the new tax regime.
3. Surcharge: The new tax regime benefits not just the middle class but also the rich. The highest surcharge was brought down from 37% to 25%. Hence the total tax, including cess, is reduced to 39% from 43%.
4. Simpler: The new regime is simpler as it has only six tax slabs against seven.
5. Freedom to invest: Under the new tax regime, you can invest in any investment without any preconceived limit. Moreover, there are no rules governing your investment pattern.
6. Higher disposable income: The new tax regime leaves more amount in the hand of taxpayers as there is no compulsion to invest in tax-saving investments.

Concerns related to the new tax regime

• In the new tax regime, with no deductions, the total taxable amount will be higher than in the old tax regime.
• People who were saving and investing to save taxes, will now not be encouraged enough to do so with the new tax regime.

Old Tax Regime

The old tax regime has existed for a long time and has deductions and exemptions. It has only four tax slabs with an exemption limit of Rs 2.5 lakhs. Following are the tax slabs under the old regime.

The old regime had a slew of deductions and exemptions for the salaried class. These help taxpayers reduce their taxable income. By using a combination of deductions and exemptions, you can reduce your taxable income to a large extent. The following table shows some of the most common deductions and exemptions under the old tax regime.

Benefits of Od Tax Regime

With deductions and exemptions under section 80c and section 80d, the old tax regime promotes saving and investing for the future. From short-term to long-term goals, the old tax regime has investing options for every investor’s goal.

Limitations of old tax regime

Retaining the proof of investments and expenses for filing income taxes is always a hassle.

The tax-saving investments are limited and have lock-in periods, which hurt liquidity.

Taxpayers have low disposable income in their hands after investing in tax savings. Therefore, the current needs are compromised.

Difference Between New Tax and Old Tax Regime

The primary differences between the new and old tax regimes are the tax slabs and rates. The new regime has six tax slabs, whereas the old regime has four; the tax rates are also slightly higher than the old regime.

Both the regimes differ in tax rebate under section 87A, with the old regime having Rs 5 lakhs as the limit and the new regime having Rs 7 lakhs.

The old regime has tax deductions under section 80C, which are absent in the new tax regime.

Let's see how much tax you can save in both regimes at different income levels.

The above table compares the old tax regime with the new tax regime and revised tax regime. It is assumed that the taxpayer has saved Rs 1,50,000 under section 80 C under the old tax regime. The total tax payable also includes the health and education cess of 4%.

It can be observed that the old regime is the best for income up to Rs 12 lakhs. If you earn more than Rs 12 lakhs, you will pay fewer taxes in the new regime in July 2023. However, for next year, when you file your taxes in July 2024, irrespective of the income level, you can go with the revised new regime as you will be saving more tax. Before filing taxes, it is always better to compare both methods and see which is more beneficial.

Please keep in mind that the old tax regime is the default for FY 2022-2023 (return will be filed between April 1st 2023, and March 31st 2024). The newly announced revised regime in the latest budget (2023) will be the default option for FY 2023 – 2024, for which you will file taxes between April 1st 2024 and March 31st 2025.

How to choose between the old tax regime and the new tax regime?

As can be seen in the above table, for the FY 2022-2023, if your income is below Rs 12 lakhs, it is best to follow the old regime as you will be saving more tax. However, if you earn more than Rs 12 lakhs, the new tax regime will be beneficial as your disposable income will be higher. It is best to compare both options before filing taxes as we have not considered all the deductions and exemptions.

For FY 2023-2024, the new regime is better, irrespective of your income level. If you opt for the new regime, ensure you handle your investments and insurance, as section 80C is optional.

Which tax regime should I opt for?

The government has left the choice of the tax regime to the taxpayer. For the current year, the old regime is still the default option, and if you want to choose the new regime, you must select it while filing your returns. However, from next year, the revised new regime will be the default option, and if you want to go with the old regime, you must select it from the dropdown while filing taxes.

You can choose the tax regime depending on your income level and your investments. However, consider saving, insurance, and investment, irrespective of the regime you choose.

Frequently Asked Questions

Is there any standard deduction in the new tax regime of 2023?

The government has introduced a standard deduction of Rs 50,000 for the new regime in the union budget 2023.

Can I opt for the old tax regime?

Yes, you can opt for the old regime if you want to invest in tax-saving schemes. If your income exceeds Rs 12 lakhs, you are better off choosing the new regime as you will pay less tax. However, comparing both regimes before filing your income tax is best.

Is it good to opt for an old or new tax regime?

It totally depends on whether you want to claim tax deductions and exemptions. If you want to claim deductions, then the old regime is better. However, evaluating both options is better before filing your taxes.

Can I save more tax than Rs 1.5 lakh?

Yes, you can save more than Rs 1.5 lakhs in taxes. The Income Tax Act 1961 has allowed deductions under section 80D, section 80TTA, 80GG, 80E, 80EE, and 80G, among others. You must check whether you qualify for claiming deduction under these heads.

Can we switch between the old and new tax regimes every year?

You can only switch between the old and new tax regime once in your lifetime by submitting an application on or before the due date of filing the income tax return under Section 139 (1) of the Income Tax Act, 1961.

If you are a salaried employee, you have the option to switch it every financial year.

Which tax regime is better for an annual salary of Rs 15 lakhs?

For an income of Rs 15 lakhs, the new regime is better as you will save close to Rs 15,000 in taxes, provided you claim only deductions under section 80 C.

Which tax regime is better for an annual salary of Rs 20 lakhs?

The new tax regime is better for an annual salary of Rs 20 lakhs as your tax payable would be Rs 3,51,000 as against Rs 3,66,600 in the old regime.

Which tax regime is better for an annual salary of Rs 25 lakhs?

The new tax regime is better for an annual salary of Rs 25 lakhs as your disposable income would be higher due to lower taxes.

Which tax regime is better for an annual salary of Rs 30 lakhs?

For Rs 30 lakhs, the new tax regime is better as you will save around Rs 15,600 in taxes compared to the old regime.