The Difference Between Old and New Tax Regime

The new tax regime was first announced in Budget 2020, and this year, in Budget 2023, several changes were announced. Here is a detailed look at the new tax regime vs the old tax regime and their benefits and drawbacks, for taxpayers to understand which will suit them better. 

What is New Tax Regime 

The new tax regime has six tax slabs - with the tax rates being 0%, 5%, 10%, 15%, 20%, and 30%. Each of these works out to a lower rate of income up to 15 lakhs per annum. The new tax rate exempts income up to 7 lakhs per annum. However, the old tax regime benefits and exemptions that benefitted taxpayers are not applicable in the new regime. 

Benefits of New Tax Regime

The new tax regime in some cases it’s better than the old regime as that it allows for tax-free investments from income without any restrictions. Additionally, there is zero tax liability for income under 7 lakhs. 

Limitations of Opting for the New Tax Regime 

The biggest disadvantage of the new tax regime is that, since no exemptions are allowed, the taxable income could increase. The only benefit allowed under the new tax regime is the standard deduction of Rs 50,000, which was already available in the old tax regime. 

What is Old Tax Regime

The old tax regime had four tax slabs ranging from 0% to 30%. The zero-deduction level was pegged at 5 lakhs per annum. This is the biggest differentiating factor in the old tax regime vs the new tax regime. The old tax regime offers several deductions that provide taxpayers several benefits to ensure lower taxes, thanks to the additional sections in the Income Tax Act. 

The benefit of opting for the Old Tax Regime 

The old tax regime lets you plan your taxes according to your savings, providing a future-proof plan. Investments under Section 80C allowed deductions from tax of up to 1.5 lakhs. This system encouraged people to save as part of their tax planning. 

Limitations of Opting for the Old Tax Regime 

In comparing the old vs new tax regime, there are limitations in both. For the old regime, the investments required for tax saving reduce cash liquidity. For many families, there are committed investments like home, marriage, or education loans, and then, investments for tax purposes can hit you hard. Moreover, even after tax-deductible investments, obtaining the deduction can be a hassle. 

Income Tax Slab Rates for New Vs Old Tax Regime 

Old Vs New Tax Regime – Which tax regime is better? 

Both tax regimes have their advantages and disadvantages. The old tax regime allowed tax deductions, encouraging investments for tax benefits, and securing the family's future in the process. However, the new regime does not allow any deductions, eliminating compulsory saving and investment. The biggest difference between the old vs new tax regime 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. 

On the other hand, the tax slabs for income brackets have increased, so it may allow for lower taxes in the long run.  

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 do not want to invest. But for the people who earn above 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 - you could claim HRA, LTA, food bills, phone bills, etc. These will all be taxable in the new regime. 

• Your savings under Sec 80C, home loan interest, etc, were exempt from tax, lowering your bracket. The new regime does not allow these. 

• Now add these deductions, to your income, so the taxable income is clear. Check the tax bracket and the tax percent. That’s how much is paid in the new regime. 

• Compare the two, taxes in the old regime vs taxes in the new regime and decide. 

The one thing clear is that henceforth investments should not be to save taxes but to secure your family's future. 

FAQs

1. 1) Will the old tax regime be discontinued? 

• No, it will still be an option. 

1. 2) Is standard deduction applicable in the new tax regime? 

• Yes, up to Rs. 50,000 

1. 3) Are you opting for a new tax regime u/s 115bac? 

• Section 115BAC was introduced in Budget 2020 in the new tax regime. Section 115BAC allows taxpayers to income tax at a lower rate, but they will have to forego many tax exemptions and deductions. 

1. 4) Is 80c applicable in the new tax regime? 

• No. 

1. 5) Is 80ttb applicable in the new tax regime? 

• No. 

1. 6) Is HRA exemption available in the new tax regime? 

• No. 

1. 7) How to opt for the new tax regime? 

• Rule 21ag states that every individual and HUF who wishes to exercise the option under section 115bac (new tax regime) has to apply form 10-i.e., electronically on the income tax portal by using either a digital signature or electronic verification code (EVC). 

1. 8) Who will benefit from the new tax regime? 

• The new tax regime will benefit middle-class taxpayers who have a taxable income of up to Rs 15 lakh. 

1. 9) Is the new tax regime optional? 

• Yes, it is. The present tax regime is still in effect and the taxpayer has the option of choosing between the old and new tax regimes that best fit their needs. The government has not imposed any penalties for failing to convert to the new tax regime.