With the introduction of the new tax regime in 2020 and changes thereafter, taxpayers ought to know the differences between the new and old tax regimes. Here is a detailed look at the new tax regime and the old tax regime, along with their benefits and drawbacks, for taxpayers to understand which will suit them better.
Old Tax Regime
The old tax regime in India is a tax system allowing taxpayers to claim various deductions and exemptions to reduce their taxable income. By providing tax benefits for specific investments and expenditures, the old regime incentivises individuals to save and invest for long-term financial security and retirement planning.
For individuals with fewer eligible expenses or who do not invest in prescribed tax-saving instruments, the benefits of the old tax regime are limited, potentially leading to higher tax liabilities compared to the new regime.
New Tax Regime
The new tax regime was introduced vide Union Budget 2020 as an alternative to the existing tax regime, in order to offer lower tax slab rates without the scope for deductions or investments.
A simplified structure increases transparency and reduces the chances of errors and disputes during tax filing and assessment. However, it eliminates many deductions and exemptions, such as
House Rent Allowance (HRA)
Leave Travel Allowance (LTA)
Entertainment Allowance and Professional Tax
Interest on Home Loan u/s 24b on: Self-occupied or vacant property
Tax deductions specified under Chapter VIA of the Income Tax Act (80C,80D, 80E,80CCC, 80CCD, 80D, 80DD, 80DDB,, 80EE, 80EEA, 80EEB, 80G, 80GG, 80GGA, 80GGC, 80IA, 80-IAB, 80-IAC, 80-IB, 80-IBA, etc) expect for deduction u/s 80CCD(2), 80JJA and 80CCH.
Deductions specified in Section 32(1)/32AD/33AB/33ABA
Deductions available under Section 80TTA/80TTB (on interest from savings account deposits)
Deduction for family pension under Clause (iia) of Section 57
Other allowances
Under new tax regime, the perquisites will be taxed as per the provisions of Income-tax Act, 1961 read with prescribed rules under Income-tax Rules, 1962. However, the employees can claim the deductions of the expenses that are specifically incurred for official purposes.
It is important to note that salaried individuals have the option to switch between the old and new tax regime every year at the start of the financial year or at the time of filing return. However, once new tax regime is opted for a year, no tax benefits can be claimed under the old tax regime.
However, in case of individuals with income from business and profession, the option to switch to the old tax regime is available only once in the individual’s lifetime i.e. if the individual had opted for new tax regime in any of the previous Financial years and chooses to opt for old tax regime for current Financial year then the individual is not allowed to switch back to the new tax regime in any of the subsequent Financial years.
Old Tax Regime Vs New Tax Regime
Here is a comparison of what each of these tax regimes has to offer based on some of their key aspects.
| | Old Tax Regime
| New Tax Regime
|
| Structure | Complex with multiple deductions and exemptions
| Simplified with lower tax rates as compared to old tax regime.
|
Tax Rates
| Higher tax rates with the potential to reduce taxable income through deductions and exemptions
| Lower tax rates without the benefit of most deductions and exemptions
|
Deductions and Exemptions
| Allows for various deductions and exemptions
| Eliminates many deductions and exemptions
|
| Flexibility | Encourages long-term savings and investments through tax incentives
| Lacks incentives for specific savings and investments
|
| Savings and Investments | Requires investment in specific tax-saving instruments, restricting financial flexibility
| Provides more flexibility as there is no need to invest in specific instruments for tax benefits
|
Tax Planning
| Enables tailored tax planning strategies to maximise deductions and exemptions
| Simplifies tax planning with straightforward calculation
|
| Compliance | Requires extensive documentation and detailed record-keeping
| Reduces compliance burden due to fewer documentation requirements
|
Transparency and Errors
| Higher complexity may lead to errors and disputes
| Increased transparency and reduced chances of errors and disputes
|
Tax Slab Rates
| Beneficial for taxpayers with significant eligible expenses
| Benefits vary solely based on income levels
|
Ideal for
| Taxpayers with higher eligible expenses and investments, who can benefit from deductions and exemptions
| High-income taxpayers looking for a simplified tax structure with lower rates, and those who do not have significant tax-saving investments
|
Income Tax Slab Rates for the New And Old Tax Regime
Here is a comparison of tax slab rates for the old regime vs those of the new regime.
Income Range
| New Tax Regime
| Old Tax Regime (Individual > 60 years and HUF)*
|
Up to ₹2,50,000
| Exempt from taxation
| Exempt from taxation
|
₹2,50,000 to ₹3,00,000
| 0%
| 5%
|
₹3,00,001 to ₹5,00,000
| 5%
| 5%
|
₹5,00,001 to ₹6,00,000
| 5%
| 20%
|
₹6,00,001 to ₹9,00,000
| 10%
| 20%
|
₹9,00,001 to ₹10,00,000
| 15%
| 20%
|
₹10,00,001 to ₹12,00,000
| 15%
| 30%
|
₹12,00,001 to ₹15,00,000
| 20%
| 30%
|
Above ₹15,00,000
| 30%
| 30%
|
Notes:
1. Basic exemption limit for individuals above 60 years but less than 80 years is ₹3 lakhs and for individuals above 80 years is ₹ 5 lakhs under the old tax regime.
2. Further, an additional 4% Health & education cess will be applicable on the tax amount calculated as above
3. Moreover, surcharge may be applicable as per the rates prescribed under Income Tax Act, 1961 where the total income is more than ₹ 50 lakhs.
The key difference to take note of when comparing the old tax regime vs the new is that the old tax regime has higher rates but offers options to reduce taxes. The new regime has marginally lower taxation but offers no ways to reduce taxes. Hence, the choice is best made based on your income and investment plans. An online income tax calculator may prove to be a helpful tool when looking to understand the tax liabilities under these regimes.
How To Choose Between Old And New Tax Regime
In practical terms, the new tax regime will benefit people with a taxable income of up to 15 lakhs who have comparatively less tax saving investments. to invest. But for the people who earn more than 15 lakhs, and who have planned investments for tax deduction, the old regime is better. It is best to do a comparative evaluation of applicable taxes in numbers, before committing to the old tax regime or the new tax regime. Here is a quick way to do the math of the old regime vs new regime.
Calculate all the exemptions that were available in the old regime - - HRA, LTA, food bills, phone bills, and other similar expenses. They will all be taxable in the new regime.
Your savings under Section 80C, home loan interest, and other similar schemes, were exempt from tax, lowering your bracket. The new regime does not allow these.
Now add the above deductions/exemptions under the old tax regime to your income, so that the taxable income is clear. Check the tax bracket and the tax percentage applicable. That’s how much is to be paid in the new regime.
Compare the two (taxes applicable according to the old regime vs taxes applicable according to the new regime) and decide.
FAQs
1) Will the old tax regime be discontinued?
2) Is standard deduction applicable in the new tax regime?
3) Should you opt for new tax regime u/s 115 BAC?
Section 115BAC was introduced in Union Budget 2020 as the new tax regime. Section 115BAC allows taxpayers to be taxed at a lower rate, but they will have to forego many tax exemptions and deductions. New tax regime is generally more beneficial for individuals with income less than Rs. 15 lakhs who have deductions less than Rs. 1.5 lakhs. Hence, Individuals should carefully assess their income, deductions, and tax liabilities to determine which regime is more beneficial for them.
4) Is 80 C applicable in the new tax regime?
5) Is 80 TTB applicable in the new tax regime?
6) Is HRA exemption available in the new tax regime?
7) How to opt for the new tax regime?
8) Who will benefit from the new tax regime?
9) Is the new tax regime optional?
10) Are there separate slab rates for individuals belonging to different categories in new tax regime?
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