The Indian income tax system levies a tax on individual taxpayers depending on their income level. However, from 2020-21, the method of levying taxes changed.
A new tax regime was announced wherein the tax rates were reduced significantly, along with a massive reduction in tax-saving opportunities. The government has incorporated many incentives in the 2023 Budget to support implementing the new system
The Indian tax system offers salaried individuals two options for filing their Income Tax Return (ITR): the old tax regime and the new tax regime. Each regime has its own set of tax slabs, deductions, and exemptions. Choosing the right regime can significantly impact your final tax liability.
New Tax Regime
The new tax regime was introduced in budget 2020 with concessional tax rates. However, the taxpayers who opted for the new tax regime could not claim major deductions like HRA, LTA, 80C, and many others. This leads to a smaller number of taxpayers opting for this regime. Hence, in Budget 2023, to make the new tax regime more lucrative, the following key changes were introduced:-
- Default Regime:- New tax regime is set as a default regime which means if you haven’t informed your employer about which regime to choose from, the TDS calculation will be done on the basis of the new tax regime only from FY 23-24.
- Tax Rate:- The basic exemption limit under the new tax regime has been raised to Rs 3 lakh from Rs 2.5 lakh from FY 23-24 to make the new tax regime more attractive. Also, the highest tax rate of 30% will be levied above Rs 15 lakh income.
- Rebate Limit:- The rebate under section 87A has been hiked to Rs 7 lakh from Rs 5 lakh under the new tax regime from FY 23-24. The rebate benefit will be up to Rs 25000, provided income doesn’t exceed the limit of 7 lakhs.
- Standard Deduction:- Individuals with salary income can claim a standard deduction of Rs. 50,000 from their gross salary income from FY 23-24. Family pensioners opting for the new tax regime can claim a standard deduction of Rs 15,000 from their pension income.
- Slashed the surcharge limit:- Reduction in the surcharge on annual income above 5 crores from 37% to 25% under the new regime. The highest tax rate is 42.74%, which would slash the maximum tax rate to 39% after this reduction.
- Leave encashment exemption:- The limit of Rs. 3 lakh for tax exemption on leave encashment on non-government salaried employees has been raised to Rs. 25 lakh.
- Insurance plans:- As per the announcement in the Budget 2023-24, income from traditional insurance policies where the premium is more than Rs 5 lakh will not be tax-free.
- Tax Slabs:- The new tax regime has reduced the income tax slabs from 6 to 5.
The tax exemption limit has been raised to 3 lakhs, and the new tax slabs are as follows. Here are the new vs old tax regime slab-
Annual Income
Income Tax Slab Old Regime
Up to Rs. 3 lakhs
Nil
Rs.3 – 6 lakh
5%
Rs.6 – 9 lakh
20%
Rs. 9-12 lakh
30%
The following table illustrates the changes in New Tax Regime slabs with respect to changes announced in Union Budget 2024-
Tax Slab for FY 2023-24
Tax Rate
Tax Slab for FY 2024-25
Tax Rate
Upto Rs 3 lakh
Nil
Upto Rs 3 lakh
Nil
Rs 3 lakh – Rs 6 lakh
5%
Rs 3 lakh – Rs 7 lakh
5%
Rs 6 lakh – Rs 9 lakh
10%
Rs 7 lakh – Rs 10 lakh
10%
Rs 9 lakh – Rs 12 lakh
15%
Rs 10 lakh – Rs 12 lakh
15%
Rs 12 lakh – Rs 15 lakh
20%
Rs 12 lakh – Rs 15 lakh
20%
More than 15 lakh
30%
More than 15 lakh
30%
Old Tax Regime
The tax system that existed before the implementation of the new regime is the old tax regime. Approximately 70 exclusions and deductions are available under this system, including HRA and LTA, that can reduce your taxable income and minimise your tax payments.
Section 80C, the most prevalent and substantial deduction, allows for a reduction in the taxable income of up to Rs.1.5 lakh. Additionally, the taxpayers are offered the option of choosing between the existing and new tax regimes.
List of a Few Exemptions and Deductions in Old Tax Regime Slabs
Here’s the list (not exhaustive) of exemptions-
- Leave Travel Allowance
- House rent allowance
- Deductions available under Section 80TTA/80TTB (on interest from savings account deposits )
- Entertainment allowance deduction and professional tax (For government employees)
- Tax relief on interest paid on home loan for self-occupied or vacant property u/s 24
- Deduction of Rs 15000 permitted from family pension under clause (ii a) ( Section 57)
- Tax-saving investment deductions under Chapter VI-A (80C,80D, 80E,80CCC, 80CCD, 80D, 80DD, 80DDB,, 80EE, 80EEA, 80EEB, 80G, 80GG, 80GGA, 80GGC, 80IA, 80-IAB, 80-IAC, 80-IB, 80-IBA, etc) (Except, deduction under Section 80CCD(2)—employers contribution to NPS, and Section 80JJA) and so on. These popular tax-saving investment options include ELSS, NPS, PPF, and a tax break on insurance premiums.
One can still claim a deduction under sub-section (2) of section 80CCD, basically an employer’s contribution towards an employee’s account in NPS and section 80JJAA ( for new employment).
Difference Between Old Vs New Tax Regime: Which should a person choose?
The choice of switching to the new tax regime or staying in the old tax regime, or whether the regime is best for you, must be based on the tax savings deductions and exemptions available in the previous tax system.
Old Vs New Regime Example
Suppose an individual has an income of Rs. 7,75,000. The following table shows the tax calculation under the new and old regimes:
| Particulars | Old Tax Regime | Proposed New Tax Regime |
Gross Salary | 7,75,000 | 7,75,000 |
Interest deduction on housing loan (self-occupied) deduction/HRA exemption | – | – |
Standard Deduction | -50,000 | -75,000 |
Gross Total Income | 7,25,000 | 7,00,000 |
Deduction under Section 80C | -50,000 | – |
Deduction under Section 80D | – | – |
Deduction under Section 80CCD(1B) | – | – |
Total Taxable Income | 6,75,000 | 7,00,000 |
Tax | 47,500 | 20,000 |
Rebate | – | -20,000 |
Surcharge | – | – |
Cess | 1900 | – |
Total Tax | 49,400 | – |
Total Deductions/Exemptions | 1,00,000 | 75,000 |
Some Estimates: Old Regime vs New Regime
Here are some estimates to help you decide between the existing and new tax regimes:
- The new regime will be advantageous when total deductions are less than 1.5 lakhs.
- When total deductions exceed 3.75 lakhs, the old regime will be beneficial.
- When total deductions range from 1.5 lakhs to 3.75 lakhs: this is determined by your income level.
Summing Up Old Tax Regime Vs New Tax Regime
People often wonder about the difference between old and new tax regime. The new income tax regime would cater to people who do not want excessive deductions or do not wish to avoid tax preparation burdens. This may include nonsalaried taxpayers (including consultants) who are ineligible for Section VIA exemptions and deductions.
FAQs
What is the old tax regime?
The old tax regime is the existing tax structure under which taxpayers can claim various deductions and exemptions under different sections of the Income Tax Act. It has a higher tax rate but allows taxpayers to claim tax benefits on various investments and expenses.
What is the new tax regime?
The new tax regime is a simplified tax structure introduced in Budget 2020, under which taxpayers can pay lower taxes but have to forego maximum deductions and exemptions. The new tax regime has lower tax rates than the old regime but eliminates the tax benefits of various investments and expenses.