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Old Vs New Tax Regime: Which is Better for Salaried Individuals?
Budget 2023 came up with a lot of changes, with the main focus on making the new tax regime more attractive. The motive behind these changes was to encourage more and more taxpayers for the adoption of the new tax regime.
Due to several amendments as per Budget 2023 there is a lot of confusion among taxpayers regarding the choice between the old and new tax regimes.
Let us look at both regimes and calculate which regime will be the most beneficial to opt for in 2023.
New Tax Regime
The new tax regime was introduced in budget 2020 with concessional tax rates. But the taxpayers who opted for the new tax regime could not claim major deductions like HRA, LTA, 80C, and many others. This leads to less 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 having 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 revised tax structure as per the new tax regime is:-
Income Tax Slab Rate for New Tax Regime post Budget 2023
|Range of income||Tax Rate|
Old Tax Regime
You can read more about income tax slabs here.
The comparison for the tax rates is as follows:
|Income Tax Slab||Old Tax Regime FY 2022-23 (AY 2023-24) and FY 2023-24 (AY 2024-25)||New tax Regime (Before budget 2023) (until 31st March 2023)||New Tax Regime (After Budget 2023) (Applicable from 1st April 2023)|
|₹0 - ₹2,50,000||-||-||-|
|₹2,50,001 - ₹3,00,000||5%||5%||-|
|₹3,00,001 - ₹5,00,000||5%||5%||5%|
|₹5,00,001 - ₹6,00,000||20%||10%||5%|
|₹6,00,001 - ₹7,50,000||20%||10%||10%|
|₹7,50,001 - ₹9,00,000||20%||15%||10%|
|₹9,00,001 - ₹10,00,000||20%||15%||15%|
|₹10,00,001 - ₹12,00,000||30%||20%||15%|
|₹12,00,001 - ₹12,50,000||30%||20%||20%|
|₹12,50,001 - ₹15,00,000||30%||25%||20%|
|More than ₹15,00,000||30%||30%||30%|
Which is better? New Tax Regime or Old Tax Regime
This decision to switch in between new or old tax regime depends on several factors like:-
- Investment Goals- It is always advised to evaluate investment goals before selecting which tax regime to choose. The new tax regime suits you if you are flexible with your investments and looking forward to not investing in tax-saving instruments. However, If you have investment goals such as retirement savings or building a corpus for a long-term goal, the old tax regime may be more beneficial as it offers deductions for contributions to various investment instruments.
- Simplicity- The new tax regime documentation process is simple, it eliminates the need to calculate and claim deductions and exemptions, which helps taxpayers to file the ITR quickly.
- Income level- Under the new tax regime, the tax rates are lower than the old tax regime. The new tax regime may be more beneficial if you have a higher income. As per budget 2023, an individual with INR 9 lakh annual income will have to pay INR 45,000 as tax, which is 5% of the taxable income. This represents a reduction of INR 47,500 from the INR 92,500 tax liability that the same individual would have had under the old tax regime.
Similarly, an individual with INR 15 lakh annual income will have to pay a tax of INR 1.5 lakh under the new tax rates introduced under budget 2023 for the new tax regime, which is a reduction from the earlier tax liability of INR 1.87 lakh calculated as per new tax regime rates before budget 2023. The reduction in tax liability is due to the lower tax rates under the new tax regime, which has revised tax slabs and rates to relieve taxpayers.
- Deductions and exemptions- Under the old tax regime, you can avail of a deduction of Rs 1.5 lakh under Section 80C and Rs 2 lakh under Section 24(b) on the interest amount for self-occupied property. This means a straight deduction of Rs. 3.5 lakh can be availed under the old tax regime, while the new tax regime does not offer such deductions and exemptions.
Particulars Old Regime New Regime Gross Salary 700,000 700,000 Less : Standard deduction Yes Yes Net Salary Less :Deductions / Exemptions 80C Deductions Yes No Interest on Home Loan Yes No 80D Deductions/ All other Yes No Employees Contribution under NPS Yes No Any Other deduction Yes No HRA / LTA / Other exemptions Yes No Total of all deductions/ exemptions Yes No Taxable Income 0 0
Breakeven Threshold to decide which regime to choose: New vs Old Tax Regime
Budget 2023 proposes an increment in rebate under Section 87A for taxpayers opting for a new tax regime as per which taxpayers who earlier had to pay zero income tax on income up to Rs 5 lakh will now pay zero tax for income up to Rs 7 lakh.
Also, has extended a standard deduction of Rs. 50,000 for salaried individuals under the new tax regime.
As a result of deduction and rebate along with the tweak in income tax slab, salaried individuals will have to pay zero tax liability up to the income of Rs 7.5 lakh annually. Thus going for a new tax regime is very clear here.
For earnings above 7.5 lakh, we have calculated a breakeven point for various income levels. The break-even point is the amount where there will be no difference in tax liability between both regimes.
If your total eligible deductions and exemptions in the old regime are higher than the breakeven threshold for your income level, stick with the old regime. If the breakeven threshold is higher than your total eligible deductions and exemptions, the new regime may be more beneficial for you.
If you have salary income:
Have you also been stuck between the choice of a more beneficial tax regime?? Relax!! We have made it easier for you. Use our Old vs New Tax Regime Calculator.
Frequently Asked Questions
Q- 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.
Q- 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.
Q- Which tax regime is better for me?
The choice between the old and new tax regime depends on individual preferences and financial goals. If you have several tax-saving investments and expenses, the old tax regime might be better for you. However, if you prefer simplicity and don't have many tax-saving investments, the new tax regime might be a better option.
Q- Can I switch between the old and new tax regime?
Yes, taxpayers can switch between the old and new tax regime every year at the time of filing their tax returns. However, once you opt for the new tax regime for a year, you cannot claim any tax benefits available in the old tax regime.Also, for individuals with income from business and profession, the tax regime opted for in the previous tax returns also applies to the subsequent years.
Q- Are there any limitations to the new tax regime?
Yes, the new tax regime does not allow taxpayers to claim deductions under section 80C, 80D, 80E, 80G, and others. It also eliminates the tax benefits of maximum exempt allowances like House Rent Allowance (HRA) and leave travel allowance (LTA) etc.
Q- Can I claim deductions under both the old and new tax regimes?
No, you cannot claim deductions under both the old and new tax regimes for the same financial year.