Understanding Difference between Old and New Tax Regimes in India

In India, the government introduced a new optional tax regime from the financial year 2020-21 onwards to simplify the tax structure and lower tax rates. With the new provisions introduced in the Union Budget 2023, the new tax regime has become the default one, replacing the old tax regime that existed before.

However, taxpayers still have the choice to switch to the old regime if they find it more beneficial based on their income level and deductions/exemptions available. Let's understand the difference between old and new tax regimes with respect to tax rates, deductions available, and how they can help you in tax planning.

• Table of contents

1. Tax rates under old vs new regime
2. Key differences between old and new tax regimes
3. Deductions allowed
4. Impact on taxpayers across slabs
5. Old Vs New Regime Example
6. Other budget provisions
7. When should you choose the old vs new tax regime?
8. How to choose between old and new tax regimes?

Tax rates under old vs new regime

Under the old tax regime, there were 3 tax slabs with rates ranging from 5% to 30% excluding cess and surcharges. Taxpayers were eligible for a host of around 70 exemptions and deductions that could significantly reduce their tax outgo. On the other hand, the new tax regime offers significantly lower tax rates within 5 slabs ranging from 5% to 30%. However, taxpayers opting for the new regime will not be eligible for most common deductions like HRA, LTA, 80C, home loan interest, etc.

To illustrate – for an income between Rs. 9-12 lakh, the tax rate is 30% under the old regime but only 15% under the new. Similarly, income above Rs. 15 lakh attracts a maximum rate of 30% in the old regime versus 15% in the new regime. Below is a tabular comparison of new tax regime vs old regime.

Tax slabs under new and old regime
Old tax regime		New tax regime
Tax slab (₹)	Old tax rates	Tax slab (₹)	New tax rates
0 – 2.5 lakh	0%	0-3 lakh	0%
2.5 lakh – 5 lakh	5%	3 lakh – 7 lakh	5%
5 lakh – 10 lakh	20%	7 lakh-10 lakh	10%
10 lakh & above	30%	10 lakh-12 lakh	15%
–	–	12 lakh-15 lakh	20%
–	–	15 lakh & above	30%

Key differences between old and new tax regimes

Tax rates:

Old regime: Typically, higher tax rates with more deductions and exemptions.

New regime: Typically, lower tax slabs with fewer deductions and exemptions.

Old regime: Provides various deductions and exemptions (e.g., 80C, 80D, 80E).

New regime: Most deductions and exemptions are removed, with only the standard deduction allowed.

Taxable income:

Old regime: Calculated after applying eligible deductions and exemptions.

New regime: Calculated after limited deductions.

Suitability:

Old regime: May be suitable for taxpayers in higher tax brackets or with significant investments and deductions.

New regime: May be suitable for taxpayers with lower incomes and fewer deductions.

Deductions allowed

Some key deductions like family pension deduction, and employer's NPS contribution are now available in both regimes. However, the old regime allows nearly 70 exemptions and deductions like HRA, LTA, Section 80C investments up to Rs. 1.5 lakh, home loan interest, medical insurance, tuition fees, children education allowance, leave encashment etc. These exemptions are not permitted under the new regime.

Impact on taxpayers across slabs

Income up to Rs. 15 lakh annually

It is estimated that the new tax regime could be more tax efficient for individuals with an annual income of up to Rs. 15 lakh. In this income bracket, the lower tax rates under the new regime along with limited deductions make it advantageous compared to the old tax regime. The standard deduction available in both regimes and other deductions like NPS contribute further to reducing the tax outgo.

Income between Rs. 15-20 lakh annually

For those earning an annual income exceeding Rs. 20 lakh, the old tax regime is likely to be more tax efficient. At higher income levels, the substantial deductions and exemptions available exclusively in the old regime can significantly offset tax payments. The savings may outweigh the benefits of lower tax rates of the new tax regime for individuals with income above Rs. 20 lakh.

Income above Rs. 20 lakh annually

For those earning an annual income exceeding Rs. 20 lakh, the old tax regime is likely to be more tax efficient. At higher income levels, the substantial deductions and exemptions available exclusively in the old regime can significantly offset tax payments. The savings may outweigh the benefits of lower tax rates of the new tax regime for individuals with income above Rs. 20 lakh.

Old Vs New Regime Example

Let’s look at the difference between the tax outlay of an individual earning Rs. 9,00,000 a year under the old and new tax regimes:

Particulars	Old Tax Regime	New Tax Regime
Income	₹9,00,000	₹9,00,000
Standard Deduction	₹50,000	₹75,000
Deductions (e.g., 80C, 80D)	₹1,50,000 (Assumed 80C fully utilized)	Not applicable
Taxable Income	₹7,00,000	₹8,25,000

Other budget provisions

The Budget 2023 introduced some changes to make new regime more attractive:

·       Increased basic exemption limit to Rs. 3 lakh from Rs. 2.5 lakh in old regime

·       Total tax rebate raised to Rs. 7 lakh from Rs. 5 lakh earlier 

·       Simplified and reduced surcharge rates for high income individuals

·       Leave encashment exemption limit increased 8 times to Rs. 25 lakh

To sum up, the below table explains the basic comparisons between old vs new tax regime

Feature	Old regime	New regime
Tax Rates	3 slabs	5 slabs
Deductions	70+ exemptions & deductions (HRA, LTA, 80C, etc.)	Limited deductions (standard deduction, family pension, NPS)
Tax Outgo	Lower if you utilise deductions well	Lower for most incomes below Rs. 15 lakh
Suitable for	High incomes with many deductions	Low to moderate incomes without substantial deductions

When should you choose the old vs new tax regime?

Your choice of tax regime depends on your finances and preferences. Here’s a guide

Choose the old regime if:

You have significant investments and eligible deductions: The old regime is beneficial if you make use of multiple deductions under sections like 80C (PPF, ELSS), 80D (health insurance), 80E (home loan etc.

Your income is high: The old regime offers deductions that can lower taxable income and overall tax liability.

You have specific financial goals: If you have long-term goals require tax-advantaged investments, the old regime may be better suited to your needs.

Choose the new regime if:

You have lower income and fewer deductions: If your income is low and you don’t have many deductible investments, the new regime’s lower tax rates might reduce your tax liability.

You prefer simplicity: The new regime simplifies tax calculation by removing the need to track multiple deductions.

Key considerations:

Calculate your tax liability under both regimes: Use calculators or consult a tax professional to assess your tax under both regimes, considering your income and deductions.

Consider your long-term financial goals: Assess how each regime fits into your long-term financial and investment planning.

Stay updated on tax laws: Tax regulations can change, so keep informed about any developments that could affect your decision.

How to choose between old and new tax regimes?

To make an informed choice between the old and new tax regimes, the first step to evaluate the exemptions and deductions permitted under the old tax regime. After accounting for all eligible exemptions and deductions, you can calculate your net taxable income. This net figure allows you to compute the tax liability under the old tax system and compare it with the tax liability under the new regime.

The regime with the lower tax liability may be selected for optimal benefits. Once a decision is made, it is necessary to inform your employer so they can deduct the correct amount of Tax Deducted at Source (TDS) from your salary.

Conclusion

Whilst the new tax regime offers simplicity with lower rates and fewer deductions, the old regime allows optimising tax outgo substantially through various exemptions for eligible taxpayers. Individuals must evaluate their tax liabilities after claiming all deductions/exemptions in both regimes to choose what fits them best. Overall, the new regime could be relatively advantageous for most individual taxpayers with annual income up to Rs. 15 lakh.

FAQs

What is the old tax regime?

The old tax regime refers to the earlier tax framework that allows taxpayers to avail of several deductions and exemptions under various provisions of the Income Tax Act, 1961. Although it involves higher tax rates, it provides opportunities to reduce taxable income through claims on specific investments and expenditures.

What is the new tax regime?

The new tax regime, introduced in Budget 2020, offers a simplified tax framework with lower tax rates compared to the old regime. However, it requires taxpayers to forfeit most deductions, removing the tax benefits associated with various investments and expenses.

Can I switch between the old and new tax regime?

Some taxpayers have the flexibility to switch between the old and new tax regimes each year when filing their tax returns. However, opting for the new tax regime in a particular year means you forgo all tax benefits available under the old regime for that year.

For individuals with income from business or profession, the rules are more restrictive. They can switch from one regime to the other only once in their lifetime.

Which tax regime is better for 7 lakhs?

For individuals with an income of Rs 7 lakhs, the new tax regime may be a more favorable option.

Which tax regime is better for a 30 lakhs salary?

For individuals with an income of Rs 30 lakhs, the new old tax regime can be advantageous if you optimise the deductions available.

Which tax regime is better for a 50 lakhs salary?

For individuals with an income of Rs 50 lakhs, the new old tax regime can be advantageous if you optimise the deductions available.

What deductions are allowed in the new tax regime?

Under the new tax regime for FY 2023-24, a few specific deductions can still be claimed, including:

1. Standard deduction of Rs. 50,000.
2. Employer’s contribution to NPS under Section 80CCD (2).
3. Contributions to the Agniveer Corpus Fund under Section 80CCH.

Is HRA exemption available in the new tax regime?

Under the new tax regime, the HRA exemption under Section 10(13A) is not permitted. Additionally, most commonly claimed exemptions are also disallowed.

Which form shall be filed for opting for the old tax regime?

Form 10-IEA must be submitted if you wish to opt for the old tax regime while filing your tax returns.

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