Old Vs New Tax Regime: Which One Should You Choose?

The Indian government announced a new income tax regime in Budget 2020, which became available to taxpayers beginning in FY2022. However, it was not widely adopted. Finance Minister Nirmala Sitharaman announced a significant change to the new tax regime in the Union Budget 2023 to encourage greater adoption. In addition, the recent budget has generated considerable confusion among taxpayers regarding the choice between the old vs new tax regime. These modifications will take effect for the fiscal year beginning in April 2023 and ending in March 2024 (FY2023-24 or simply FY24), which is also known as assessment year (AY) 2024-25.

It is evident from these modifications that the government intends to move taxpayers from the old regime to the new regime and eventually phase it out. Although the new tax regime is now the default, the old tax regime will continue to exist.

What is the new tax regime, what changes have been made to it, and how does it compare to the previous tax regime? Which tax regime should you choose now that the government has attempted to level the playing field between the old vs new tax regimes?

Let’s examine both regimes and determine which among the old vs new tax regimes will be chosen in 2023.

The Old Tax Regime

The income tax brackets for the old tax regime were not changed for FY24 and remain as follows.

Choosing the old tax regime, however, entitles you to a long list of exemptions, some of which are listed below:

• Section 80C of the Income Tax Act exempts incomes up to 1,500,000 rupees. This permits investments in pension funds (EPF, PPF), certain mutual funds (ELSS), ULIPs, tax-saving fixed deposits, and other savings schemes such as National Savings Certificate, Sukanya Samriddhi Yojana, Senior Citizens Savings Scheme, etc. Section 80C also exempts expenses for life insurance, principal repayment on a mortgage, and child tuition.
• Under Section 80CCD, an additional 50,000 invested in an NPS can be deducted from taxable income.
• Other tax benefits, such as spending on health insurance for oneself and one’s parents, are deductible under Section 80D.
• In the old tax regime, additional exemptions can be claimed for leave travel allowance, house rent allowance based on salary structure and rent paid and a host of other benefits.

The New Tax Regime  

The new tax system has six tax brackets, with no tax on income up to 3 lakhs. For each additional 3 lakhs of income, the tax rate goes up by 5%.

Also, the above tax rates apply to people with a taxable income of more than 7 lakhs. According to the latest announcement in the Union Budget 2023, there will be no tax for people whose taxable income is less than 7 lakhs.

The amount of income tax is charged in steps. This means that a person who makes 10 lakhs will not be taxed at a flat 15% rate (as shown in the table above) on the whole amount. In the tax calculation, their income up to 3 lakhs won’t be taxed at all, and their income between 3 lakhs and 6 lakhs will be taxed at 5% (5% of 3 lakhs = 15,000). Their income between 6 lakhs and 9 lakhs will be taxed at 10% (30,000), and the last 1 lakhs of their income will be taxed at 15% (15,000), for a total of 60,000 in taxes.

Like before, the new tax system has one requirement. People can’t use common exceptions when choosing the new tax system instead of the old one. This is talked about later in the article. But the FM did say that salaried taxpayers can take an extra 50,000 off their income as a standard deduction when figuring their taxes.

Exemptions under the New Tax Regime

Even though the old tax system still has a lot of benefits, there are still some kinds of income that aren’t taxed under either system. These items, including:

• Interest earned on a Post Office Savings Account under Section 10(15)(i) up to a maximum of 3,500.
• Gratuity from an employer, up to a maximum of 20 lakhs.
• Amount paid out at the end of a life insurance policy, as described in Section 10(10D).
• An Employer can put up to 12% of salary into NPS or EPF, and interest on EPF can be up to 9.5% p.a.
• Earnings from life insurance.
• Income from farming.
• Standard rent reduction.
• Retrenchment compensation.
• Leave encashment on retirement.
• VRS gets up to 5 lakhs rupees.
• Retirement cum death benefit.
• Money is given as a scholarship to help pay for education.
• Interest and amount of PPF or Sukanya Samriddhi Yojana at the end of its term.
• Commutation of a pension. The new tax system lets you claim deductions under sections 80CCD(2) (employers’ contributions to a pension plan that has been approved) and 80JJAA (for a new job).

Old Vs New Tax Regime – Which is better?

The changes announced for Fiscal Year 24 make the new tax regime appealing to two groups of people.

• It’s the obvious choice for people whose income are less than 7 lakhs (or 7.5 lakhs if they get a salary since they can deduct an extra 50,000).
• Even for people with higher incomes, the new tax system may make sense for those who can’t get a lot of exemptions because they can’t invest or spend enough to get the most out of Section 80C/D or because they don’t have a home loan or don’t rent.

Here’s how you could choose between the new tax system and the old tax system.

The old tax regime may be more appealing to you if you can get a tax break of about 40% of your annual income or 4.5 lakhs (whichever is less) from Section 80C, Section 80D, house rent, and home loan repayments.

Here is an example of how to figure it out for someone who makes 12 lakhs a year.

Under the old tax regime, the salary was 12 lakhs, but after investing 1.5 lakhs under section 80C, contributing 50,000 to NPS, and claiming 2.5 lakhs as house rent exemption, 4.5 lakhs of income was removed from the calculation.

Choosing the Old Tax Regime in 2023

To opt for the new tax regime, taxpayers with business or professional income must file Form 10IE. This form was launched in October 2020.

According to the Union Budget 2023 amendments to the new tax regime, taxpayers will be required to choose between the old vs new tax regimes beginning in the fiscal year 2023-24, with the new tax regime being the default option.

The procedure for electing the old tax regime will be prescribed by the tax department in due course.

Conclusion

Since 2014, the income tax slabs have remained unchanged. Finance Minister Nirmala Sitharaman unveiled a new income tax system for the first time when she presented the Budget 2020. For the financial year 2023–2024, the government has announced several steps to move towards a simpler tax system, which will help all taxpayers who choose the new system. These changes to the tax rates will make life easier for taxpayers and make it easier for people to plan for their long-term financial goals.

There are benefits and drawbacks to both the new and old income tax slabs. Under the old tax system, there were many deductions and exemptions, such as PPF, ELSS, and Mediclaim. This gave the taxpayer a lot of investment options. The new tax system is set up to help new investors and people who just started a new job because their income has just started.

Therefore, the only way to determine which tax regime—old vs new—is better for you is to enter your income into both of them to calculate the actual tax due.

FAQs

1. Which tax system is preferable for 7 lakhs?  

Ans: If you earn more than Rs 7 lakhs per year, the new tax regime will benefit you.

2. Has the Old Tax Regime been altered in any way?  

Ans: Even though there have been many changes to the new tax system, there have been no changes to the old tax system. If a person chooses the old tax system in FY 2023-24, they will continue to figure out their income tax the same way they did in the past.

3. How to choose the Old Tax Regime in 2023?

Ans: To opt for the new tax regime, taxpayers with business or professional income must file Form 10IE. This form was launched in October 2020.

According to the Union Budget 2023 amendments to the new tax regime, taxpayers will be required to choose between the old and new tax regimes beginning in the fiscal year 2023-24, with the new tax regime being the default option.

The procedure for electing the old tax regime will be prescribed by the tax department in due course.