- Old Tax Regime
- Deductions and Exemptions Under Old Tax Regime
- Advantages of Opting for the Old Tax Regime
- Limitations of Opting for the Old Tax Regime
- New Tax Regime
- Advantages of Opting for the New Tax Regime
- Limitations of Opting for the New Tax Regime
- Income Tax Slab Rates for New Vs Old Tax Regime
- Old vs New Tax Regime – Which is Better?
Income tax is levied on all individuals, HUFs, partnership firms, LLPs, and corporations as per Income Tax Act. If an individual’s income exceeds the minimum threshold limit, they are subject to a slab system of taxation (i.e. basic exemption limit). Different tax rates are set for different categories of income under a slab system. It indicates that if a taxpayer’s income goes up, so does his or her tax rate. This type of taxation aids the government in establishing progressive and equitable taxes. This article explain about the old vs new tax regime in detail.
Old Tax Regime
Under the old structure of taxation, the assessee can claim the deduction, exemptions, and allowances with which they can have proper tax planning and save taxes.
The existing tax structure is convoluted. Despite the high tax rates, there are several strategies to lower your tax obligation. The government has provided Indian taxpayers approximately 70 exemptions and deduction choices through the addition of sections to the Income Tax Act throughout the years, allowing them to reduce their taxable income and hence pay less tax.
Some exemptions are included in your income, such as the House Rent Allowance (HRA) and Leave Travel Allowance (LTA). The deductions allow you to lower your tax obligation by investing, saving, or spending on specific items. Section 80C is the most popular and generous deduction, allowing you to reduce your taxable income by up to Rs.1.5 lakh. Besides that, there are several more exemptions and deductions most widely available for the taxpayers.
Deductions and Exemptions Under Old Tax Regime
|Public Provident Fund||House Rent Allowance|
|Equity Linked Savings Scheme (ELSS)||Leave Travel Allowance|
|Employee Provident Fund||Mobile and Internet Reimbursement|
|Life Insurance Premium||Food Coupons or Vouchers|
|Principal and Interest component of Home Loan||Company Leased Car|
|Children Tuition Fees||Standard Deduction|
|Health Insurance Premiums||Uniform Allowance|
|Investment in NPS||Leave Encashment|
|Tuition fee for Children|
|Saving Account Interest|
Your taxable income might be reduced by lakhs due to a combination of exemptions and deductions. Hence, tax planning is imperative to maximize your income, savings, and investments each year in order to limit your taxable income to a minimum.
There are advantages and disadvantages to the old tax system which are stated below:
Advantages of Opting for the Old Tax Regime
The old income tax regime instilled a savings culture in individuals over time by requiring investments in specific tax-saving instruments. It leads to saving for future events such as marriage, schooling, home purchase, medical, etc.
Limitations of Opting for the Old Tax Regime
In Spite of having many advantages, the old tax structure has its limitations too. The limitations of the old tax regime are as follows:
- The investment lock-in period hurts liquidity.
- Current level of consumption owing to committed amount of investments.
- There are a limited number of tax-saving investments available.
- Evidence retention of deductions claimed is a hassle.
- Not advantageous for taxpayers with nil or lower transactions eligible for tax deductions
New Tax Regime
Let’s start with the new tax regime. It has six tax slabs, each having a lower rate on income up to Rs. 15 lakhs. Multiple exemptions and deductions are not available due to the varying income slabs and tax rates. There are benefits and drawbacks to the new tax regime.
In two ways, the new tax scheme differs from the previous one:-
1. The number of tax slabs has expanded under the new system, with reduced rates in the range of Rs. 15 lakh brackets.
2. In the new regime, all the exemptions and deductions that taxpayers used in the old regime will be unavailable.
Advantages of Opting for the New Tax Regime
The benefits of the new tax structure are as follows:-
- The present tax regime is still in effect and the taxpayer has the option of choosing between the old and new tax regimes that best fit your needs. The government has not imposed any penalties for failing to convert to the new tax regime.
- The new tax regime allows taxpayers to invest their money without any preconceived limitation. There are no mandatory rules and regulations governing your investment pattern under the new program.
- With numerous tax slabs, you, the taxpayer, will fall into the one that best matches your annual income.
Limitations of Opting for the New Tax Regime
The disadvantages of the new tax structure are as follows: –
- With no exemptions, your total taxable income will be larger than it was under the previous tax system.
Income Tax Slab Rates for New Vs Old Tax Regime
|Old Tax Slabs||Old Income Tax Rates||New Tax Slabs||New Income Tax Rates|
|Upto Rs 2.5 lakh||NIL||Upto Rs 3 lakh||NIL|
|Rs 2.5 – Rs 5 lakh||5%||Rs 3 lakh – Rs 6 lakh||5%|
|Rs 5 – Rs 10 lakh||20%||Rs 6 lakh – Rs 9 lakh||10%|
|Above Rs 10 lakh||30%||Rs 9 lakh – Rs 12 lakh||15%|
|Rs 12 lakh – Rs 15 lakh||20%|
|Above Rs 15 lakh||30%|
In simple words you can see that the income between Rs. 6 lakh and Rs. 9 lakh is taxed at 10%, while income between Rs. 9 lakh and Rs. 12 lakh is taxed at 15% under the new system. As per the budget announcement 2023, tax rebate is increased to for new tax regime if the total income is less than Rs 7 lakh. Moreover, standard deduction now available under new tax regime as well.
Old vs New Tax Regime – Which is Better?
Both the new and old income tax slabs slabs have their benefits and drawbacks. It all depends on whether you want to claim deductions and exemptions under the new tax slab, which includes a variety of income levels and rates. Deductions and exemptions are available under the old tax slab. Before you submit your taxes, you should do a comparative evaluation and assessment under both tax systems. You can use Scripbox’s Income Tax calculator and know the net tax payable under each of the regimes. This way you can plan your taxes ahead and invest accordingly. The calculator also suggests which regime is suitable for you.
Let’s use the example of Mr. Vipul, who makes Rs 40 lakh each year. He uses a combination of EPF and ELSS mutual funds to utilize Section 80C limit of Rs. 1.5 lakh. He also purchased health insurance for which he paid a Rs 25,000 premium (self and spouse) and Rs. 50,000 (senior citizen – parents), which he claims as a tax deductible under Section 80D. He also invested an extra Rs 30,000 in NPS to save even more taxes from his income. Vipul also claimed a tax-free Leave Travel Allowance sum of Rs 25,000.
Let’s see if the old vs new tax regime- which will put more money in his pocket.
Illustration on Income Tax Calculation (Old vs New Tax Regime)
|Particulars||Old Tax Regime (Rs.)||New Tax Regime (Rs.)|
|Less: Standard Deduction||50,000||50,000|
|Less: Section 80C (EPF +LIC+ Tuition Fees, etc)||150,000||Nil|
|Less: House Rent Allowance||50,000||Nil|
|Less: Health Insurance- self and spouse- parents (if senior citizen)|
|Less: Leave Travel Allowance||25,000||Nil|
|Less: New Pension Scheme 80CCD (1B)||30,000||Nil|
|Total (Deduction & Exemption)||3,80,000||Nil|
|Net Taxable Income (Annual Income – Total deductions & exemptions)||36,20,000||39,50,000|
Total Tax Payable as per Old Regime
|Income Tax Slabs (Rs.)||Old Tax Rates||Tax(Old) (Rs.)|
|0 – 2,50,000||0%||₹0|
|2,50,000 – 5,00,000||5%||₹12,500|
|5,00,000 – 7,50,000||20%||₹50,000|
|7,50,000 – 10,00,000||20%||₹50,000|
|10,00,000 – 12,50,000||30%||₹75,000|
|12,50,000 – 15,00,000||30%||₹75,000|
|15,00,000 & above||30%||₹636,000|
|Add: Higher Education Cess @4%||₹35,940|
|Total tax payable||₹934,440|
Total Tax Payable as per New Regime (FY 23-24 & AY 24-25)
|Income Tax Slabs (Rs.)||New Tax Rates||Tax(New)(Rs.)|
|0 – 3,00,000||0%||₹0|
|3,00,000 – 6,00,000||5%||₹15,000|
|6,00,000 – 9,00,000||10%||₹30,000|
|9,00,000 – 12,00,000||15%||₹45,000|
|12,00,000 – 15,00,000||20%||₹60,000|
|Add: Higher Education Cess @4%||₹35,400|
|Total tax payable||₹920,400|
So, you can see here the new tax regime turns out to be better. Opting for the new tax regime instead of the old regime will result in lower taxes by Rs 14,040.
Both the new and old income tax slabs have advantages and disadvantages. Due to the variety of deductions and exemptions available under the former tax regime, such as PPF, ELSS, and Mediclaim, the taxpayer had a lot of investment choices. The new tax regime is tailored to new investors and individuals who have only recently begun their careers, as their income has only recently begun.
As a result, the only way to determine old vs new tax regime- which is better for you is to enter your income into both regimes to determine the actual tax payable.