In recent years, the Indian tax system has undergone significant changes, with the introduction of a new tax regime that rivals the old one. For taxpayers, this addition has resulted in a new landscape of tax regulations, benefits, and liabilities. We have compared and contrasted the two of them, highlighting the key differences between them.
The old tax regime in India is based on the existing Income Tax Act, 1961 with multiple tax slabs and exemptions. The new tax regime, introduced in the 2020 Union Budget, is based on a simplified tax structure with lower tax rates but fewer exemptions. Key differences between the two regimes are:
Old Tax Regime: Fewer tax slabs (5%, 20%, 30%) with various exemptions and deductions allowed, such as HRA, LTA, investments in 80C, 80D etc.
New Tax Regime: Lower tax rates (5%, 10%, 15%, 25%, 30%) but at a cost of No exemptions or deductions, except for investments in NPS and specified disability equipment.
If you choose to pay tax under the new tax regime, you are not allowed to claim any deduction like 80C, 80D, HRA etc.
But, if you would like to take the advantage of such deductions to reduce your taxable income, you can opt for the old regime, but you will end up with a higher tax bracket.
In summary, the new tax regime offers lower tax rates but with fewer tax benefits, while the old tax regime has higher tax rates but more exemptions and deductions. The taxpayers can choose between the two regimes based on their personal financial circumstances and tax liability.
In budget 2023, tax slabs and tax rates for individuals have been reduced to five slabs and allowed standard deduction of Rs.50,000 for salaried individuals proposed in new tax regime which previously was not allowed.
Our comprehensive analysis will help taxpayers understand the pros and cons of each regime and make an informed decision about which regime is best for their individual financial circumstances. Whether you are a seasoned taxpayer or just starting to navigate the world of taxes, this article will provide valuable insights and information to guide you on your journey.
Now although it varies from person to person, we did a broad analysis based on common exemptions & deductions available under the Old tax regime and the New Tax regime and calculated the breakeven level of exemption/deductions where the tax liability would be equal in both old regime and old regime.
Breakeven level says that if your deduction amount is at par with the breakeven level, your tax liability will be the same in both regimes.
If Your deduction amount is higher than BE level, it is better to choose old regime as your taxable income will be lesser after claiming those deductions and as a result tax liability will be lesser and vice versa.
The Data shows the breakeven deduction limit including standard deduction.
If your deduction amount is equal to these breakeven amount, your tax liability will be same in both old and new regime.
If your deduction amount is more than these breakeven amounts, it is better to stay with old regime.
If your deduction amount is less than these breakeven amounts, it is better to move to new regime.
The maximum deduction considered is ₹4.25L and it includes 80C, 80CCD, 80D, 24B, Standard deduction
There are 4 friends - Abhishek, Deepak, Priyanka & Nandini, all salaried.
| Tax Liability under Old Tax Regime | Abhishek | Deepak | Priyanka | Nandini |
| Total Income | 50,00,000 | 50,00,000 | 1,00,00,000 | 1,00,00,000 |
| Deduction | ||||
| Standard Deduction | 50,000 | 50,000 | 50,000 | 50,000 |
| 80C | 1,50,000 | 1,50,000 | 1,50,000 | 1,50,000 |
| 80CCD (1B) | 50,000 | 50,000 | 50,000 | 50,000 |
| 80D | 25,000 | 25,000 | 25,000 | 25,000 |
| 24(B) | 2,00,000 | 2,00,000 |
| Net Taxable Income | 47,25,000 | 47,25,000 | 97,25,000 | 97,25,000 |
| Upto 2.5L | ||||
| 2.5L-5L | 12,200 | 12,200 | 12,200 | 12,200 |
| 5L-10L | 1,00,000 | 1,00,000 | 1,00,000 | 1,00,000 |
| Above 10L | 11,17,500 | 10,57,500 | 26,17,500 | 25,57,500 |
| Tax Liability under Old Regime | 12,30,000 | 11,70,000 | 27,30,000 | 26,70,000 |
| Tax Liability under New Tax Regime | Abhishek | Deepak | Priyanka | Nandini |
| Total Income | 50,00,000 | 50,00,000 | 1,00,00,000 | 1,00,00,000 |
| Standard Deduction | 50,000 | 50,000 | 50,000 | 50,000 |
| Taxable Income | 49,50,000 | 49,50,000 | 99,50,000 | 99,50,000 |
| Upto 3L: Nil | ||||
| 3L-6L: 5% | 15,000 | 15,000 | 15,000 | 15,000 |
| 6L-9L: 10% | 30,000 | 30,000 | 30,000 | 30,000 |
| 9L-12L: 15% | 45,000 | 45,000 | 45,000 | 45,000 |
| 12L-15L: 20% | 60,000 | 60,000 | 60,000 | 60,000 |
| Avobe 15L: 30% | 10,35,000 | 10,35,000 | 25,35,000 | 25,35,000 |
| Tax Liability under New Regime | 11,85,000 | 11,85,000 | 26,85,000 | 26,85,000 |
As you can see, Abhishek and Priyanka will be benefited by opting for the new regime whereas sticking to the old regime will make sense for Deepak and Nandini.
Conclusion:
If your current deductions are at par with the breakeven level, it is better to stick to the old regime. However, we strongly suggest NOT TO opt for the old regime with the sole objective of tax savings through forced investments. We expect that going forward, the government may look towards complete withdrawal of the old tax regime, making the new tax regime more efficient and attractive.
"The proposed changes in the new tax regime clearly indicate that the government is encouraging taxpayers to invest using their own discretion instead of tax savings through forced investments. This will also enable circulation of money efficiently as there will be more liquidity in hand."
Mimi Partha Sarathy
Managing Director,
Sinhasi Consultants Pvt. Ltd.
The new tax regime is, as we see it, a simplified structure as compared to the old tax regime. The key features of the new regime such as lower tax rates and fewer exemptions and deductions make it easier for taxpayers to calculate their tax liability and comply with tax regulations. The simplified structure reduces the complexity and compliance burden associated with the old tax regime, making it a more attractive option for taxpayers who prefer a straightforward and uncomplicated tax system. However, it is important for taxpayers to carefully evaluate their individual financial circumstances and determine which regime is more beneficial for them..
