New Tax Regime vs Old Tax Regime: Which One to Choose

What is New Tax Regime?

A new tax slab was introduced in Budget 2020 that became effective from 1 April 2020. This new income tax slab offered lower tax rates, but deductions and exemptions will not be available under the new regime except deductions u/s 80CCD(2). It allows you to lower your tax liability subject to certain conditions and is optional.

Budget 2023 announced several amendments to make the new tax regime more lucrative; the following key changes were introduced:-

Default Regime:- The new tax regime is set as a default regime, meaning if you haven’t informed your employer about which regime to choose from, the TDS calculation will be based only on the new tax regime.

Tax Rate:- The basic exemption limit was raised to Rs 3 lakh from Rs 2.5 lakh 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. The rebate benefit will be up to Rs 25000, provided income doesn't exceed the limit of 7 lakhs.

Standard Deduction:- Individuals having salary income can claim a standard deduction of Rs. 50,000 from their gross salary income. 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 revised tax structure as per the new tax regime is:-

Which are the exemptions/deductions unavailable under the new tax regime?

With the introduction of the new regime, 70 out of 100 deductions were disallowed under the new regime. The following exemptions and deductions are some of the most important ones which would not be available if the new tax slab is chosen for tax calculation –

• House Rent Allowance under Section 10 (13A)
• Leave Travel Allowance under Section 10(5)
• Allowances under Section 10(14)
• Food coupons and other tax-free allowances and perquisites
• Deductions under Chapter VI A of the Income Tax Act like Section 80C, 80D, 80TTA, etc.
• Deduction for home loan interest paid for self-owned house property under Sections 24 (b) and Section 80EEA.

For more details please check here. https://tax2win.in/guide/income-tax-slab-rates-updated

Which Exemptions and deductions are still available under the new tax regime?

The following deductions and exemptions are still available under the new tax regime –

Standard deduction of INR 75,000 from salary income under Section 16. (Earlier, this deduction was only Rs. 50,000; however, after budget 2024, this limit was increased to Rs. 75000).

• Employer’s contribution to the NPS for up to 10% of employee’s salary under Section 80CCD (2) [ 14% in case of Govt employee]
• Standard deduction of 30% from net rental income if house property is let out.
• Home loan interest paid can be deducted from the rental income of a house property. However, loss from the House Property head can not be removed from any other income head.
• Transport allowance exemption will be available to divyang employees to meet the day-to-day travel expenses from the workplace to home.
• Conveyance allowance will be allowed to meet the expenditure on the conveyance for the purpose of performing the official duty.
• Allowances granted will be allowed to meet the cost of traveling on tour or on transfer to the employees.
• Daily allowance granted for day-to-day ordinary expenses in case of absence from his / her normal place of duty.

What is Old Tax Regime?

The Old Tax Regime typically refers to the traditional income tax system in India. Under the Old Tax Regime, taxpayers have the option to avail various deductions and exemptions provided under the Income Tax Act, 1961, such as those for investments in provident funds, life insurance premiums, housing loan repayments, tuition fees, etc.

In this regime, taxpayers can calculate their taxable income after claiming these deductions and exemptions, which ultimately reduces their tax liability.

Comparison Of Old v/s New Tax Regime Slab Rates

Old vs New Regime : Which Tax Slab is Better?

Ever since the new tax regime was proposed, many are debating as to which tax regime is better, the old one with deductions or the new one without them? The answer is relative. One tax regime cannot be universally beneficial for all. Your income, its type, available deductions, and exemptions determine which tax regime would give you better tax benefits. You should calculate your tax liability using both regimes, and the regime that gives you the lowest tax liability should be chosen depending on your requirements.

Here are some calculations showing you the tax liability under both tax slabs for different types of incomes –

Let us understand with another example :

So, a salaried employee can benefit from the old tax regime by claiming exemptions/ deductions. In case the taxpayer wants to claim more exemptions/ deductions, then he should opt for the old tax regime subject to other conditions. You can read more here.

In the second example, since the exemptions/ deductions available to him were lower as compared to the previous example, it was more beneficial for him in opting for the new tax regime. Further, the decision of a suitable tax regime depends on case to case.

Some more examples showing taxability at different income levels:

Salary Income: Rs.5,00,000 FY 2024-25

Note: There is NO impact on tax payments because of rebate u/s 87A.

Salary Income: Rs.7,00,000 FY 2024-25

Salary Income: Rs.8,00,000 FY 2024-25

Salary Income: Rs.15,00,000 FY 2024-25

Salary Income : Rs.20,00,000 FY 2024-25

Is there a situation of paying the same tax under both tax regimes?

Let's get a brief over some of the indifferent points between the old and new tax regimes:
For FY 2022-23

*Tax amount has been rounded off to the nearest thousands
For FY 2023-24

*Tax amount has been rounded off to the nearest thousands

In the cases mentioned above, the taxpayer will be indifferent to both schemes. Both schemes will result in approximately the same amount of tax.

What are the benefits or disadvantages of opting for both tax regimes?

The various benefits or disadvantages of the old and new tax regimes include:-

The bottom line
The bottom line comes down to numbers. Before deciding on which regime is suitable for you, you need to calculate your tax liability under both regimes with and without deductions and exemptions. The regime which gives you the lowest tax liability would be better depending on your requirements. Mrs. Sitharaman has given you the choice of reducing your tax liability in any way possible and so, the onus is on you to find out which regime works better for you.