Our honourable Finance Minister Nirmala Sitharaman announced several changes in the new tax regime while announcing Budget 2023. While choosing the new regime was an option earlier, she surprised everyone by making it the default regime from the new financial year. For salaried employees, this means their organisation will deduct their taxes according to the new rules unless they request their employer to continue with the old tax regime.
The Finance Minister first launched the new regime in 2020, but most people opted to continue with the old regime due to the bigger benefits it offered. The new regime launched in 2023 has several revisions to simplify taxes, maintenance of records, and claim exemptions and deductions. It provides several ways to help taxpayers claim deductions, optimise salary, reduce tax outgo, and make
tax-saving investments more efficient.
Those who want to make their tax planning more straightforward will find some merit in considering the new regime. However, those who are fine with compliance and want to save maximum taxes must
compare the old regime vs the new regime to make the right call. Here's all you need to know about the two regimes for making a good choice.
New Regime Comes with More Tax Slabs at Lower Rates
The old tax regime and new tax regime
are different from each other in various aspects:
- The recent budget increased the number of new tax regime slabs to six. As a result, the tax rates are 0, 5, 10, 15, 20, and 30% now.
- The new regime does not offer tax deductions and exemptions available in the old regime. Instead, it provides a standard deduction of ₹ 50,000, also available in the old regime.
- If the taxable income under the old regime is under ₹ 5 Lakh, the individual does not need to pay any taxes. However, the new regime makes the entire income tax-free if the taxable income is below ₹ 7 Lakh after all deductions.
Old Regime Has Higher Rates but More Options for Tax Deduction
Although the old regime is complicated and has higher rates, it offers several ways to reduce tax liabilities. Over the years, the options for tax deductions and exemptions have increased under the old tax regime, totalling over 70 benefits to reduce their taxable income.
Exemptions are part of the salary, like HRA and LTA, while deductions reduce the tax amount by saving, spending, or investing in specific things. For instance, Section 80C reduces the taxable income by ₹ 1.5 Lakh besides tax savings on
Home Loans and health insurance.
Some examples of tax exemptions include HRA, LTA, internet and mobile reimbursement, food vouchers and coupons, company leased vehicle, leave encashment, uniform allowance, etc. Options for tax deductions include PPF, ELSS, EPF, life insurance, health insurance, interest and principal components on Home Loans, tuition fees for children,
NPS investment, savings account interest, etc.
These deductions and exemptions can significantly reduce the taxable income, depending on the ones a taxpayer is eligible to claim. However, that also means finding ways to optimise the salary and reduce the tax payment each year.
Income Tax Slab Rates for New Vs Old Tax Regime
| Income Tax Slab Old Regime | Annual Income | Income Tax Slab New Regime |
|---|
| Nil | Up to Rs.2.5 lakhs | Nil |
|---|
| 5% | Rs.2.5 – 5 lakh | 5% |
|---|
| 20% | Rs.5 – 7.5 lakh | 10% |
|---|
| Rs. 7.5 – 10 lakh | 15% |
|---|
| 30% | Rs. 10-12.5 lakh | 20% |
|---|
| Rs. 12.5-15 lakh | 25% |
|---|
| Rs. 15 and above | 30% |
|---|
In simple words, if your income is between Rs. 6 lakh and Rs. 9 lakh, you'll be taxed at 10%. If your income falls between Rs. 9 lakh and Rs. 12 lakh, your tax rate will be 15% under the new system. The 2023 budget announcement has increased the tax rebate for the new tax regime if your total income is less than Rs 7 lakh. In addition, the standard deduction is now available under the new tax regime too.
Which One to Choose Between Old and New Tax Regime?
Answering this question needs a little bit of research and an understanding of the difference between the old and new tax regime. Comparing the two tax regimes does look complicated initially, but approaching them systematically will help determine which regime works best for you. Here are the two most important steps that help choose which tax regime to opt for:
Calculating All Exemptions
Those living on rent can claim HRA, one of the most significant
exemptions for salaried employees. Other tax-free items include food bills, phone bills, LTA, etc. All these components will attract taxes after shifting to the income tax new regime. Taxpayers get a standard deduction by default in both tax regimes.
Looking at Deductions
The old regime has numerous tax deductions like those under Section 80C, including Home Loan interest payment and
instant personal loans online loan app used for specific purposes. The new regime does not have any such deductions.
After considering these deductions and exemptions, the taxpayer must combine them and deduct them from the salary. It will help them calculate their taxable income and see if letting go of these deductions is worth it. That could be a deciding factor when choosing between the
old and new tax regime.
Opting for a Suitable Tax Regime
You can choose a suitable tax regime based on your income sources and specific situation. Switching between the two regimes is possible only once or on a yearly basis, depending on the income sources during the year.
- If the Income Comes from a Business or Profession
If you are a professional or business owner, you will have to pay new rates for the subsequent years after opting for the new regime. You can make the switch only once. However, under certain circumstances, you can switch back to the old regime.
- If the Income Does Not Come from a Business or Profession
In such a case, you can switch between tax regimes every year. Employers must withhold tax for salaried employees before paying the salaries until the employee informs them of their preferred tax regime. You too can choose their tax regime at the beginning of a financial year and disclose their choice to the employer. Your employer may also ask about your preferred regime during the employment process. You’ll also have the option to change their regime selection while filling out the return.
With changes in the new regime, if you’re earning an annual income of ₹ 9 Lakh: you must pay a tax of ₹ 45,000, which is 5% of the salary. However, if you are eligible for exemptions or deductions under the old regime tax slab, choosing the same would be more beneficial. Since eligible deductions do not apply to all, one choice is not the best for everyone. You must evaluate all your tax liabilities under regimes and make an informed choice.
