The Budget 2023 caused a lot of confusion among taxpayers regarding the choice between the old and new tax regimes. The government introduced various incentives in the 2023 Budget to encourage the adoption of the new regime.
These changes show that the government intends to have taxpayers transition to the new regime and eventually phase out the old one. Though the new regime is now the default tax regime, the old tax regime will continue to exist.
Let’s look at both regimes and see which regime to opt for in 2024.
A new tax regime was introduced in Budget 2020 wherein the tax slabs were altered, and taxpayers were offered concessional tax rates. However, those who opt for the new regime cannot claim several exemptions and deductions, such as HRA, LTA, 80C, 80D , and more. Because of this, the new tax regime did not have many takers. The government in the Budget 2023 introduced 5 key changes, which remain the same even for FY 2024-2025 since no changes were made in the Interim Budget 2024, to encourage taxpayers to adopt the new regime. They are:
Total Income | Rate of Tax |
up to ₹3,00,000 | Nil |
₹3,00,001- ₹6,00,000 | 5% |
₹6,00,001- ₹9,00,000 | 10% |
₹9,00,001- ₹12,00,000 | 15% |
₹12,00,001- ₹15,00,000 | 20% |
₹15,00,001 and above | 30% |
Income Slab | Old Tax Regime | New tax Regime | New Tax Regime |
₹0 - ₹2,50,000 | - | - | - |
₹2,50,000 - ₹3,00,000 | 5% | 5% | - |
₹3,00,000 - ₹5,00,000 | 5% | 5% | 5% |
₹5,00,000 - ₹6,00,000 | 20% | 10% | 5% |
₹6,00,000 - ₹7,50,000 | 20% | 10% | 10% |
₹7,50,000 - ₹9,00,000 | 20% | 15% | 10% |
₹9,00,000 - ₹10,00,000 | 20% | 15% | 15% |
₹10,00,000 - ₹12,00,000 | 30% | 20% | 15% |
₹12,00,000 - ₹12,50,000 | 30% | 20% | 20% |
₹12,50,000 - ₹15,00,000 | 30% | 25% | 20% |
>₹15,00,000 | 30% | 30% | 30% |
The old regime is the tax system that prevailed before the introduction of the new regime. Under this regime, there are over 70 exemptions and deductions available, including HRA and LTA, that can reduce your taxable income and lower tax payments. The most popular and generous deduction is Section 80C, which allows for a reduction of taxable income up to Rs.1.5 lakh. The taxpayers are given a choice between the old and the new tax regime.
The decision to switch to the new or remain in the old tax regime or which regime is better for you shall be based on the tax savings deductions and exemptions you are eligible for in the old tax regime. To make it easier, we have calculated a breakeven point for various income levels (refer to the table below) for a salaried individual below 60 years of age. This can be used to determine which regime to choose.
The Breakeven point is that amount where there will be no difference in tax liability between the two tax regimes.
If your total eligible deductions and exemptions in the old tax regime are higher than the breakeven threshold for your income level, it is advisable to stay in the old regime. On the other hand, if the breakeven threshold is higher, then moving to the new tax regime is more beneficial.
Income Level | Less: Standard Deduction | Net Income | Tax under both regimes | Additional Deductions | Which Regime to choose old or new tax regime
|
₹7,00,000 | ₹50,000 | ₹6,50,000 | ₹0 | ₹1,50,000 | You will benefit only in new regime. |
₹8,00,000 | ₹50,000 | ₹7,50,000 | ₹36,400 | ₹1,38,500 | Old regime: if deductions > Rs 1,38,500 |
₹9,00,000 | ₹50,000 | ₹8,50,000 | ₹41,600 | ₹2,12,500 | Old regime: if deductions > Rs 2,12,500 |
₹10,00,000 | ₹50,000 | ₹9,50,000 | ₹54,600 | ₹2,50,000 | Old regime: if deductions > Rs. 2,50,000 |
₹12,50,000 | ₹50,000 | ₹12,00,000 | ₹93,600 | ₹3,12,500 | Old regime: if deductions > Rs. 3,12,500 |
₹15,00,000 | ₹50,000 | ₹14,50,000 | ₹1,45,600 | ₹3,58,000 | Old regime: if deductions > Rs. 3,58,000 |
₹15,50,000 | ₹50,000 | ₹15,00,000 | ₹1,56,000 | ₹3,75,000 | Old regime: if deductions > Rs. 3,75,000 |
₹16,00,000 | ₹50,000 | ₹15,50,000 | ₹1,71,600 | ₹3,75,000 | Old regime: if deductions > Rs. 3,75,000 |
Here are a few calculations that will help you decide between the old vs the new tax regime:
Here is a comparison between the deductions and exemptions available under the new and the old tax regime:
Particulars | Old Tax Regime | New tax Regime | New Tax Regime |
Income level for rebate eligibility | ₹ 5 lakhs | ₹ 5 lakhs | ₹ 7 lakhs |
Standard Deduction | ₹ 50,000 | - | ₹ 50,000 |
Effective Tax-Free Salary income | ₹ 5.5 lakhs | ₹ 5 lakhs | ₹ 7.5 lakhs |
Rebate u/s 87A | ₹12,500 | ₹12,500 | ₹25,000 |
HRA Exemption | ✓ | X | X |
Leave Travel Allowance (LTA) | ✓ | X | X |
Other allowances including food allowance of Rs 50/meal subject to 2 meals a day | ✓ | X | X |
Standard Deduction (Rs 50,000) | ✓ | X | ✓ |
Entertainment Allowance and Professional Tax | ✓ | X | X |
Perquisites for official purposes | ✓ | ✓ | ✓ |
Interest on Home Loan u/s 24b on: Self-occupied or vacant property | ✓ | X | X |
Interest on Home Loan u/s 24b on: Let-out property | ✓ | ✓ | ✓ |
Deduction u/s 80C (EPF | LIC | ELSS | PPF | FD | Children's tuition fee etc) | ✓ | X | X |
Employee's (own) contribution to NPS | ✓ | X | X |
Employer's contribution to NPS | ✓ | ✓ | ✓ |
Medical insurance premium - 80D | ✓ | X | X |
Disabled Individual - 80U | ✓ | X | X |
Interest on education loan - 80E | ✓ | X | X |
Interest on Electric vehicle loan - 80EEB | ✓ | X | X |
Donation to Political party/trust etc - 80G | ✓ | X | X |
Savings Bank Interest u/s 80TTA and 80TTB | ✓ | X | X |
Other Chapter VI-A deductions | ✓ | X | X |
All contributions to Agniveer Corpus Fund - 80CCH | ✓ | Did not exist | ✓ |
Deduction on Family Pension Income | ✓ | X | ✓ |
Gifts upto Rs 50,000 | ✓ | ✓ | ✓ |
Exemption on voluntary retirement 10(10C) | ✓ | ✓ | ✓ |
Exemption on gratuity u/s 10(10) | ✓ | ✓ | ✓ |
Exemption on Leave encashment u/s 10(10AA) | ✓ | ✓ | ✓ |
Daily Allowance | ✓ | ✓ | ✓ |
Conveyance Allowance | ✓ | ✓ | ✓ |
Transport Allowance for a specially-abled person | ✓ | ✓ | ✓ |
When deciding between the two tax regimes, it is important to take into account the tax exemptions and deductions available under the old tax regime. After deducting all eligible exemptions and deductions, the net taxable income can be determined. By calculating the tax liability based on this net taxable income under the old tax regime, it becomes possible to compare it with the tax liability under the new tax regime.
Choosing the regime with the lower tax liability is the logical approach, and it is essential to inform the employer about this choice so that the appropriate Tax Deducted at Source (TDS) can be deducted from the salary.
If you have a loss from house property, capital gains, or business & profession, you need to consider them as well while making informed decisions on the selection of regime. Along with the current year's losses, even the previous year's losses eligible to set off will get lapsed as well. Ineligibility to carry forward such losses may impact your future income determination and taxes thereon.
Many individuals often find themselves questioning the disparities between the old and new tax regimes. The new income tax regime is designed to accommodate those who have more personal commitments such as repayment of personal/vehicle loans, medical treatment of parents or dependents, or wish to avoid the burden of extensive tax preparation or have minimal tax deductions due to their ineligibility for section 10 exemptions, standard deductions, tax on employment, employer contribution to pension scheme etc., Conversely, the old tax regime can yield more tax savings for senior citizens, who derive a substantial portion of their income from interest, can benefit from Section 80TTB, which allows them to claim Rs.50,000 as interest income deduction and feel more secure under the old tax regime.
Both the old and new tax regimes possess advantages and disadvantages. The previous tax structure encourages taxpayers to cultivate a habit of saving, while the new tax structure favours employees with lower earnings and investments, resulting in fewer deductions and exemptions. The new tax system is considered safer and simpler, involving fewer records and reducing the potential for tax evasion fraud. However, due to the unique nature of individual deductions and exemptions, a thorough comparison of the two regimes is necessary to determine the best fit for each person.
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Budget 2023 introduces new tax regime with incentives, compared to the old regime remaining as an option. Key changes include higher rebate, streamlined tax slabs, and standard deduction extension. Taxpayers' choice between regimes should consider deductions and exemptions. Breakeven points can help decide the preferred regime. Comparison between the deductions and exemptions in old and new tax regimes is crucial for decision-making.