Old versus new tax scheme according to relevant 2023 Budget| The Minister of Finance has announced a new tax regime in the 2020 budget, including additional tax brackets and lower tax rates. Many taxpayers had long requested it, but it came with the condition that all deductions and exemptions allowed under the old tax system would be revoked. Moreover, the tax component applicable to the new regime has been changed in the 2023 budget, which is applicable from the financial year 2023-24 (the reference year 2024-25).
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To add to the confusion, the Treasury Secretary offered taxpayers a choice between the new tax regime and the old tax regime, leaving the choice up to the taxpayer. With all of these factors interacting, the tax code has become more complex than simple.
You ask yourself, "What would you choose - the new tax regime or the old tax regime?" This article can help you determine which tax system. Let’s look at tax brackets and tax rates, as well as the pros and cons of the two tax regimes. Followed by a comparison between the two. So, let’s get started.
New tax regime - More plates, lower tax rate, but no way to reduce taxes
There are two main differences between the new tax regime and the old tax regime.
First, under the new regime, the number of tax brackets has increased, along with a reduction in rates to sub-Rs. Range of 15 lacks.
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Second, taxpayers under the new regime will not be able to take advantage of the deductions and exemptions available under the existing tax regime.
The following is a comparison of the old tax rates and new tax rates:
|
Tax Slab(Rs.) |
Old Tax Rates |
New Tax Rates (Old) |
Tax Slab( Rs.)) |
New Tax Rates |
|
0 – 2,50,000 |
0% |
0% |
0 – 3,00,000 |
0% |
|
2,50,000 – 5,00,000 |
5% |
5% |
3,00,000 - 6,00,000 |
5% |
|
5,00,000 – 7,50,000 |
20% |
10% |
6,00,000 – 9,00,000 |
10% |
|
7,50,000 – 10,00,000 |
20% |
15% |
9,00,000 – 12,00,000 |
15% |
|
10,00,000 – 12,50,000 |
30% |
20% |
12,00,000 – 15,00,000 |
20% |
|
12,50,000 – 15,00,000 |
30% |
25% |
12,00,000 – 15,00,000 |
20% |
|
Above Rs. 15,00,000 |
30% |
30% |
15,00,000 & above |
30% |
The old tax regime is complex, to say the least. While taxes are high, there are many ways to lower your taxes.
The government has granted nearly 70 exemptions and deductions to Indian taxpayers over the years by adding sections to the Income Tax Act. This allows people to reduce their tax liability and pay fewer taxes.
While some exemptions, such as Housing Allowance (HRA) and Travel Allowance (LTA), are included in your pay, deductions allow you to reduce your tax liability by investing, saving, or spending money on goods/services of accuracy. Section 80C is one of the most popular and selected deductions, which allows you to reduce your taxable income by Rs 1,50,000.
Additionally, there are several categories that allow you to take advantage of deductions, for example, interest on your loans (both housing and education) or premiums paid for health insurance.
The followings are the most popular tax exemptions and deductions available to Indian taxpayers:
|
Exemptions |
Deductions |
|
House Rent Allowance |
Public Provident Fund |
|
Leave Travel Allowance |
ELSS (Equity Linked Saving Scheme) |
|
Mobile and Internet Reimbursement |
Employee Provident Fund |
|
Food Coupons or Vouchers |
Life Insurance Premium |
|
Company Leased Car |
Principal and Interest component of Home Loan |
|
Standard Deduction |
Children Tuition Fees |
|
Uniform Allowance |
Health Insurance Premiums |
|
Leave Encashment |
Investment in NPS |
|
|
Tuition fee for Children |
|
|
Saving Account Interest |
Your taxable income can be reduced by lakhs to include exemptions and deductions. However, it also means getting strategic each year to maximize your paycheck, investments, and/or savings to minimize your taxable income.
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Past income tax vs. old income tax. New tax regime: Which should you choose?
Because everyone is eligible for different deductions, sources, and amounts of income, the same rule may not apply to everyone. Thus, it becomes important for taxpayers to examine and understand the tax payable under both regimes before deciding which one to choose.
While the new system may look good at first because of the lower tax rates, this is not the case.
Because, with these changes, with the new tax regime, anyone earning Rs. 7.50 lakh will have to pay Rs. 25,000 in taxes. While those earning Rs. 10 faults save Rs. 37,500 with taxes.
Here’s what you need to do:
Step 1 – Calculate any tax exemptions (refunds) you can claim
Remaining in rent entitles you to HRA (Home Rent Allowance), the maximum payroll deduction. In addition, other tax-free components such as LTA (Leave Travel Allowance), Food bills, Telephone bills, etc. are also included
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The type used it. If you choose to move to the new tax regime, everything that is “untaxed” becomes “taxed”.
Step 2 - Calculate any tax deductions you are claiming
As a salaried person, you automatically take two deductions:
Standard deduction of Rs 50,000
The contribution to your Employees Provident Fund (EPF).
Even if you continue to contribute to the EPF, you will not be eligible for these deductions under the new tax regime. In addition, you can’t claim the deduction for your home loan (if you have one) or life insurance, or health insurance that previously helped you lower your taxable income.
Step 3 – Combine these tax exemptions and tax deductions and subtract them from your paycheck to get your taxable income.
Step 4 – Same as, calculating your taxable income if the deductions, as well as exemptions, were excluded.
These results can help you to decide which tax regime to opt for.
Here are two examples of tax liabilities with and without tax exemption and/or deductions under the old and new tax regimes for your convenience.
|
Annual Income |
Old Tax Regime Rates |
New Tax Regime Rates (old) |
Annual Income |
New Tax Regime Rates |
|
Up to Rs. 2.5 lakhs |
Exempt |
Exempt |
Up to Rs. 3 lakhs |
NIL |
|
Rs. 2.5 to 5 lakhs* |
5% |
5% |
Rs. 3 to 6 lakhs |
5% |
|
Rs. 5 to 7.5 lakhs |
20% |
10% |
Rs. 6 to 9 lakhs |
10% |
|
Rs. 7.5 to 10 lakhs |
20% |
15% |
Rs. 9 to 12 lakhs |
15% |
|
Rs. 10 to 12.5 lakhs |
30% |
20% |
Rs. 12 to 15 lakhs |
20% |
|
Rs. 12.5 to 15 lakhs |
30% |
25% |
Rs. 12 to 15 lakhs |
20% |
|
Above Rs.15 lakhs |
30% |
30% |
Rs. 15 lakhs and above |
30% |
Your taxable income can be reduced by lakhs to include exemptions and deductions. However, it also means that you need to find ways to maximize your paycheck, investments, and/or savings each year to keep your taxable income low.
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Past income tax vs. old income tax. New tax regime: Which should you choose?
Because everyone’s eligibility for deductions, sources, and amounts varies, the same rule may not apply to everyone. Thus, it becomes important for taxpayers to examine and understand the tax payable under both regimes before deciding which one to choose.
While, at first glance, it appears that the new system is better for lower taxes, this is not the case.
With these changes, as per the new tax regime, who's earning between Rs. 7.50 lakh will pay Rs. 25,000 in taxes. While those earning Rs. 10 lacks will save Rs. 37,500 with taxes.
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Contribution to Employees Provident Fund (EPF).
Even if you continue to contribute to the EPF, you will not be eligible for these deductions under the new tax regime. Also, you won’t be able to claim deductions for your home loan (if you have one) or life insurance policies, or health insurance policies that previously helped you reduce your taxable income.
Step 3 – Combine these tax exemptions and tax deductions and subtract them from your paycheck to get your taxable income.
Step 4 – Same as, calculating your taxable income if these deductions as well as exemptions were excluded.
The results can help you to decide which one is the tax regime to opt for.
Here are two examples of tax liabilities with and without tax exemption and/or deductions under the old and new tax regimes for your convenience.
The Income Tax Section 87A provides a tax refund to taxpayers if their total income is not more than Rs 5 lakh after deducting deductions 80C to 80U
Example 1 - Taxpayer with Income of Rs.12.5 lakhs
According to the tax slabs given above, the rate of the old tax regime is 30% and the rate of the new tax regime is 25% for a salary income of 12.5 lakhs. Let us now calculate the total tax due after taking the deductions allowed under the old tax regime.
|
Particulars |
Old Tax Regime |
New Tax Regime (Old) |
New Tax Regime |
|
Annual Income |
12,50,000 |
12,50,000 |
12,50,000 |
|
Taxable Income |
12,50,000 |
12,50,000 |
12,50,000 |
|
Less- Standard Deduction |
50,000 |
- |
50,000 |
|
Less- Deductions U/s 80C |
1,50,000 |
- |
- |
|
Less- Deductions U/s 80D* |
75,000* |
- |
- |
|
Taxable Income |
9,75,000 |
12,50,000 |
12,00,000 |
|
Total Tax Payable |
1,11,800( Approx) |
1,30,000 |
93,600 |
(*) assuming for themselves and their dependent parents are senior citizens Rs 25,000 and Rs 50,000 respectively.
If you opt for the old tax regime instead of the new one, you would save another Rs 8,000 in taxes.
Apart from the above deductions, HRA, and other deductions can also be claimed under the old regime.
Example 2 - Taxpayer with Net Income of Rs. 8 lakhs from Salary
|
Particulars |
Old Tax Regime |
New Tax Regime (Old) |
New Tax Regime |
|
Annual Income |
8,00,000 |
8,00,000 |
8,00,000 |
|
Taxable Income |
8,00,000 |
8,00,000 |
8,00,000 |
|
Less- Standarad Deduction |
50,000 |
- |
50,000 |
|
Less- Deductions U/s 80C |
1,50,000 |
- |
- |
|
Less- Deductions U/s 80D* |
50,000 |
- |
- |
|
HRA/LTA & Other |
50,000 |
- |
- |
|
Taxable Income |
5,00,000 |
8,00,000 |
7,50,000 |
|
Total Tax Payable |
0 |
46,800 |
31,200 |
The important thing
Same the new and the old income tax slab have their advantages and disadvantages. Whether you choose the new or old tax regime there should be certainly a doubt in mind - whether you should save and use life insurance or not.
The goals of buying and saving/ investing in life insurance should be to achieve your life goals and protect your family’s future, not just to take advantage of tax benefits.
