Old Tax Regime Vs. New Tax Regime: Which Is
Better In 2023?
While
there are merits and demerits of both the old and new regimes, it becomes
cumbersome for taxpayers to pick the best-suited tax regime. Here is a
simplified assessment of both the regimes to answer a few pertinent questions.
The
Government of India introduced a new optional tax rate regime starting from
April 1, 2020 (FY 2020-21), for individuals and the Hindu undivided family
(HUF). Consequently, Section 115 BAC was to the Income Tax Act, 1961 (the Act)
that prescribed reduced tax rates for individual taxpayers and HUFs on forgoing
specified tax deductions or exemptions.
Based
on the amendments proposed in Union Budget 2023, the new tax regime has been
made as a default one, and the taxpayers will have to select the old tax regime
if they wish to use it.
In
a major boost to the new income tax regime and to make it more pleasing to the
middle-class common individual, the government
has announced significant changes to the new income tax regime. The
basic exemption limit in the new tax regime has been increased to INR 3 lakh,
which was INR 2.5 lakh earlier. Also, a tax rebate on income earned up to INR 7
lakh, which was INR 5 lakh earlier under section 87A.
It
is to be noted that the old tax regime has enough room for claiming deductions
against various allowances forming part of salary (eg. HRA, LTA, etc) and also
for specified investments/ expenses such as Public Provident Fund (PPF),
National Pension Scheme (NPS), repayment of housing loan, payment of tuition
fees, etc.
On
the other hand, the new tax regime has the benefit of the standard deduction
and there is full rebate provided to individuals earning up to INR 7 lakh
annually. So, the individuals earning above
INR 7 lakh annual income have to judiciously choose between the new and
old tax regimes. As, the old tax regime provides deductions and no tax on
income up to INR 5 lakh.
Here’s
how the old tax regime differs from the new and what you must choose for as a
taxpayer.
For
an individual taxpayer, FY 2023-24 is another instance where they get to choose
between the old tax regime and the new tax regime while filing their income tax
returns. Here’s how the old tax regime differs from the new and what you must
choose for as a taxpayer.
Features
of the New Tax Regime
Lower
tax rates
The
new tax regime has widened the scope of taxation with seven tax slab rates
ranging from 0% to 30% with the highest tax rate applicable on income above INR
15 lakh. Contrary to the new regime, there were the new tax regime is much
wider in scope with five tax slab rates ranging from 0% to 30%, with the lowest
starting with INR 3 lakh. Under the old system, income up to INR 2.5 lakh is
exempt from personal income tax with the maximum rate applicable on income
above INR 10 lakh which is 30%.
The
new tax regime has rationalized the scope of taxation with five tax slab rates
ranging from 0% to 30% with the income till INR 3 lakh exempt from tax and the
highest tax rate of 30% applicable on income above INR 15 lakh. Under the old
system, income up to INR 2.5 lakh is exempt from personal income tax with the
maximum rate applicable on income above INR 10 lakh which is 30%.
Here’s
how applicable tax rates under both the regimes work:
New
Tax Regime 2023-24 (Default)
|
Net Annual Income Range |
New Regime Tax Rate |
|
INR 0-3 lakh |
Nil |
|
INR 3-6 lakh |
5% |
|
INR 6-9 lakh |
10% |
|
INR 9-12 lakh |
15% |
|
INR 12-15 lakh |
20% |
|
Above INR 15 lakh |
30% |
|
Those earning up to INR 7 lakh annually are
entitled to a rebate.
Super Rich Tax Cut: Highest surcharge rate
on the income above INR 5 crore to be reduced from 37% to 25% in the new tax
regime. |
Old
Tax Regime
|
Net
Annual Income Range |
OLD
REGIME TAX RATE |
|
Up
to INR 2.5 lakh |
Nil |
|
INR 2.5 lakh to INR 5 lakh |
5% (tax rebate u/s 87A is available) |
|
INR
5 lakh to INR 7.5 lakh |
20% |
|
INR 7.5 lakh to INR 10 lakh |
20% |
|
INR
10 lakh to INR 12.5 lakh |
30% |
|
INR 12.5 lakh to INR 15 lakh |
30% |
|
Above
INR 15 lakh |
30% |
Deductions/exemptions
to be forgone while opting for new tax regime
The
government has taken cognizance of the fact that the Act has various exemptions
and deductions which make compliance by the taxpayer and administration of the
tax laws by the tax authorities a burdensome process.
To
give relief to taxpayers the simplified new tax rate regime requires specified
tax deductions and exemptions to be forgone. Therefore, it is important to
evaluate the impact of deductions/exemptions being claimed vis-à-vis the
benefit of lower tax rates. Some of the popular tax exemptions/deductions which
are not allowed under new tax regime include:
•
Leave travel allowance (LTA)
•
House rent allowance (HRA)
•
Children education allowance
•
Deduction for professional tax
•
Interest on housing loan
•
Deduction for specified investments or expenses under Chapter VI-A such as:
–
deduction under Section 80C towards contribution to public provident fund,
repayment of principal on housing loan, children’s school fees, life insurance
premium, etc.
–
other deductions towards medical insurance premium, interest on education loan,
etc.
Opting
for the applicable tax regime
An
individual or HUF taxpayer may opt for the new tax regime based on their
specific situation and sources of income. Switching between the old and
new to the new tax regime can be done
either on a year-on-year basis or only once. However, the frequency mostly
depends on the source of income during the year.
•
Where income includes business or professional income:
In
the case where an individual or HUF has income from a business or profession,
once the option to avail new tax rates for a financial year has been exercised,
the new rates shall apply for subsequent years. However, the law provides such
taxpayers’ one single option of switching back to the old tax regime should
their circumstances change. This switch-back option is available only once in a
lifetime unless the taxpayer ceases to have any income from a business or
profession.
•
Where income does not include business or professional income:
If
an individual or HUF does not possess income from a business or profession, the
selection can be made on a year-on-year basis. For individuals with salaries,
the employer is required to withhold tax before the payment of the salaries.
The employee is, however, required to inform the employer regarding their
preferred tax rates.
An
employee may choose between old and new tax regimes at the beginning of the
year and intimate the employer, or at the time of joining new employment during
the year. However, at the time of filling the personal tax return, the employee
can change the tax regime.
For
example, at the beginning of the year, an employee opts for the new tax regime
and the employer deducts tax based on slab rates under the new tax regime.
However, during the year they make certain tax-deductible investments like
contribution to provident fund, payment of medical insurance premium, etc., and
at the time of filing the income tax returns (ITR), they realise the old tax
regime is more beneficial to them. In such a situation, they have the choice to
opt for the old tax regime while filing the tax return though the employer had
withheld taxes based on the new tax regime.
Which
Tax Regime is Better?
With
the changes in the new tax regime, an individual with INR 9 lakh annual income
will pay INR 45,000 tax which is 5% of the salary, a reduction of INR 15,000
from the present INR 60,000 under the earlier slabs under the new tax regime.
And, an individual with INR 15 lakh annual income will have to pay a tax of INR
1.5 lakh which will be down from INR 1.87 lakh.
However,
in case the individual is eligible to claim for deductions/ exemptions under
the old tax regime towards HRA, LTA, PPF, etc, the same may be more beneficial.
Since
the eligible deductions, sources and quantum of income differs for every
individual, one rule cannot be applied to all. Taxpayers will need to evaluate
and compare the tax liability under both regimes and then decide on which to
opt for.
In
case a taxpayer has investments in tax-saving instruments, pays premiums on
life or a medical insurance policy, children’s school fee, home loan principal
repayment, etc., and avails the benefit of the deduction for HRA, LTA, etc. it
may be more beneficial to opt for old tax regime since the benefit of
deduction/exemption can be availed in the old tax regime.
The
new tax regime permits a standard deduction of INR 50,000 for salaried persons
and deduction for family pension being lower of INR 15,000 or 1/3rd of the
pension.
Below
is an illustration of how two taxpayers have the same gross income but are
eligible for different tax deductions/exemptions.
Taxpayer
1 and Taxpayer 2 are salaried taxpayers with no other sources of income
|
Taxpayer 1 (in INR) |
Taxpayer 2 (in INR) |
|
|
Income from Salary |
20,00,000 |
20,00,000 |
|
Exemption for HRA |
1,20,000 |
Nil |
|
Exemption for LTA |
50,000 |
Nil |
|
Standard Deduction |
50,000 |
50,000 |
|
Deduction u/s 80C for EPF,
PPF |
150,000 |
150,000 |
Taxpayer
1
|
|
Old Tax Regime (in INR) |
New Tax Regime (in INR) |
|
Income
from Salary |
20,00,000 |
20,00,000 |
|
Less: Exemption for HRA |
1,20,000 |
Not applicable |
|
Less:
Exemption for LTA |
50,000 |
Not
applicable |
|
Less: Standard Deduction |
50,000 |
50,000 |
|
Less:
Deduction under Section 80C for PF |
150,000 |
Not
applicable |
|
Net taxable Income |
16,30,000 |
20,00,000 |
|
Tax
on the above |
3,13,560 |
2,94,400 |
Taxpayer
2: Does not have eligible exemptions for HRA, LTA
|
|
Old
Tax Regime (in INR) |
New
Tax Regime (in INR) |
|
Income
from Salary |
20,00,000 |
20,00,000 |
|
Less: Standard Deduction |
50,000 |
50,000 |
|
Less:
Standard Deduction |
150,000 |
NA |
|
Net Income chargeable under the head
salary |
18,00,000 |
20,00,000 |
|
Tax
On the above |
366,600 |
2,94,400 |
How
To opt for Old Tax Regime
Currently,
a taxpayer with income from business or profession is required to file Form
10IE for the purpose of opting for the new tax regime. This form was introduced
in October 2020.
As
per the amendments proposed by the Union Budget 2023 in the new tax regime,
from FY 2023-24 onwards taxpayers will be required to opt for the old tax
regime and the new tax regime will be the default option.
The
manner of opting for the old tax regime will be prescribed by the tax
department in due course.
Bottom
Line
The
income tax slabs have not been changed since 2014. Finance Minister Nirmala
Sitharaman introduced a new income tax regime for the first time while
presenting the Budget 2020.
Now,
for the financial year 2023-24, the government has announced various steps to
move towards a simpler tax regime which will help all taxpayers who opt for the
new tax regime. These tweaks in the tax slabs will surely lessen the burden on
taxpayers and allow individuals to plan their long-term financial goals in a
more efficient manner.
Disclaimer:
The story has been updated to add the latest details on the new tax regime
