Income Tax Regime: Old vs New - (2023)

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Income Tax Regime: Old vs New

As Financial Year 2022-23 came to a close, we have been taxed with the responsibility of choosing our tax regime between the old and the new. So, which one are you opting for? Before picking up your regime some facts and figures that can help you in this decision.

For a basic clarification on what Income Tax actually is and what is the significance, we’ll briefly look into the definition of Income Tax and how it works.

The government imposes income tax on the earnings of individuals, businesses, and other entities within a country. This tax is categorized as a direct tax, wherein the taxpayer is accountable for remitting the tax amount to the government.

The income tax system is based on a progressive tax rate structure, which means that the tax rate increases as the income level of the taxpayer increases. This ensures that those who earn more pay a higher percentage of their income in taxes than those who earn less.

Income tax is levied on various types of income, such as salaries, wages, business income, capital gains, dividends, interest, and rental income. There are also certain deductions and exemptions available that can reduce the taxable income of the taxpayer.

The collection of income tax is done by the government through its designated tax collection agency, which can differ from one country to another. The revenue collected through this tax is utilized by the government to finance various programs and services, including education, healthcare, social welfare, infrastructure development, and defense.

Failing to pay income tax or filing incorrect tax returns can result in penalties and legal consequences. Therefore, it is essential for individuals and businesses to comply with the tax laws and regulations in their respective countries.

• No income tax is applicable for individuals earning up to Rs.3 lakh.
• Individuals earning above Rs.3 lakh and up to Rs.6 lakh are subject to an income tax of 5%.
• Individuals earning above Rs.6 lakh and up to Rs.9 lakh are subject to an income tax of 10%.
• Individuals earning above Rs.9 lakh and up to Rs.12 lakh are subject to an income tax of 15%.

• Individuals earning above Rs.12 lakh and up to Rs.15 lakh are subject to an income tax of 20%.
• Individuals earning above Rs.15 lakh and up to Rs.20 lakh are subject to an income tax of 25%.
• Individuals earning above Rs.20 lakh are subject to an income tax of 30%.
• The new tax structure is the default option for taxpayers, but they can choose to switch to the old tax regime if they prefer.
• The new tax structure includes a standard deduction of Rs.50,000.

• The surcharge rate under the new tax structure has been revised, with the highest surcharge rate reduced from 37% to 25%.
• The new tax structure is effective from 1st April 2023.

• The new tax regime has increased the threshold for full tax rebate to ₹7 lakhs, compared to ₹5 lakhs in the old tax regime.
• The tax slabs have been updated, with lower tax rates for some income groups.
• The default option for income tax deduction by employers and the Income Tax Department is the new tax regime.
• The new tax regime provides fewer exemptions and deductions than the old regime, but it has increased the standard deduction.
• Taxpayers have the liberty to select either the old or new tax regimes according to their preference. Nevertheless, if a taxpayer chooses to go with the new tax regime, they will have to relinquish certain exemptions and deductions that were available in the old tax regime.

Not Allowed:

• Leave Travel Allowance (LTA)
• House Rent Allowance (HRA)
• Deduction under Section 80C, 80CCC, and 80CCD: Investments made under these sections ([80C] PPF, ELSS, NSC, Tax-saving FD, SCSS, SSY, Life Insurance Premium, and principal repayment of home loan, stamp duty, and registration fees, [80CCC] pension plan investments, [80CCD] investments in the National Pension System (NPS)) for claiming a deduction of up to Rs. 1.5 lakh are not available in the new tax regime.
• Deduction under Section 80D: Premiums paid towards medical insurance for self, spouse, and dependent children are not available in the new tax regime.
• Deduction under Section 80E: Interest paid on education loans is not available in the new tax regime.

• Deduction under Section 80TTA: Interest earned on savings bank account deposits up to Rs. 10,000 is not available in the new tax regime.

Allowed:

• Standard Deduction: An individual can claim a basic deduction of Rs 50,000 on salary income as a standard deduction.
• Deduction under Section 80 CCD (2): The employer’s contribution to the Tier-I NPS account can be deducted under Section 80 CCD (2).
• Family Pension Income Deduction: Deduction under Section 57 (iia) of family pension income.
• Agniveer Corpus Fund Deduction: To claim a deduction, taxpayers can utilise Section 80CCH (2) by paying or depositing an amount into the Agniveer Corpus Fund.

Allowed:

• Standard deduction: A standard deduction of Rs. 50,000 was allowed for salaried individuals.
• Section 80 CCD (1B): An additional deduction of up to Rs. 50,000 was allowed for the deposited amount in the National Pension System (NPS) account.
• Section 80TTA: This section allows individuals and Hindu Undivided Families to claim a maximum deduction of Rs. 10,000 against the interest earned from their savings account with a bank, cooperative society, or post office.
• Section 80D: It allowed a deduction on health insurance premiums.

• Section 80C: Investments made in specified instruments, including Public Provident Fund (PPF), Employee Provident Fund (EPF), National Savings Certificate (NSC), and life insurance premiums, were eligible for a deduction of up to Rs. 1.5 lakh.
• Section 80CCC: A deduction of up to Rs. 1.5 lakh was allowed for contributions to certain pension funds.
• Section 80CCD: A deduction of up to 10% of salary (for salaried individuals) or 20% of gross total income (for self-employed individuals) was allowed for contributions to the NPS scheme.

Not Allowed:

• Leave Travel Allowance (LTA): LTA is a component of the salary package that an employee can use to cover their travel expenses during leave. However, it is not allowed as an exemption under the old tax regime.
• House Rent Allowance (HRA): The Housing Rent Allowance (HRA) is a constituent of an employee’s salary package that can be utilized to pay for their house rent expenditures. Nevertheless, it is not accepted as an exemption under the prior tax structure.
• Deduction for Interest on Housing Loan: Taxpayers are eligible to claim a deduction for the interest paid on a housing loan only if the property is rented out, under the old tax regime. However, this deduction is limited to a maximum of Rs. 2 lakh per year and is not applicable for self-occupied properties.

• Tax Slabs: The number of tax slabs has been decreased from six to five in the new tax regime. Moreover, the minimum taxation threshold is higher under the new regime, and individuals earning an annual income of Rs. 3 lakh or less are not liable to pay any taxes, which is higher compared to the Rs. 2.5 lakh threshold under the old regime.
• Tax Rates: The new tax regime features reduced tax rates compared to the old regime, but it has certain conditions. If taxpayers choose the new regime, they will have to sacrifice exemptions, deductions, and reliefs available in the old regime. However, the new regime provides a complete tax rebate for income up to ₹7 lakhs, whereas the threshold was ₹5 lakhs under the old regime.
• Benefit for Middle Class: The new tax regime can benefit middle-class taxpayers with a taxable income up to Rs 15 lakh, while the old regime is better suited for high-income earners.

• Now that we are done examining the new income tax regime and mapping the differences between the two, let’s recap a few important factors that can be principal in determining the regime that’s most suitable for you.

  • The new tax regime provides reduced tax rates, but fewer deductions and exemptions compared to the previous tax regime.
  • To claim the benefit of standard deduction under section 16 (ia) of the IT Act, salaried individual taxpayers with a total income of up to Rs. 7.5 lakh may choose the new tax regime for FY 2022-23 (AY 2023-24).
  • The old tax regime allows for several tax deductions and exemptions, which can help taxpayers save on taxes. For example, if a taxpayer has a home loan and avails of the deduction under section 80C of up to Rs. 1.5 lakh, the old tax regime may be more beneficial.
  • Under the old tax regime, individuals with an income of less than Rs. 5 lakhs are eligible for tax deductions under section 87A.

It’s advisable to evaluate your financial situation and choose the tax regime that suits you best. Taxpayers with a high income who use the deductions to their full advantage may advantage better under the old tax regime. Whereas someone with a low income and few deductions and exemptions may benefit from the new tax regime. It’s best to use an online tax calculator and check your tax liabilities under both.

Negotiating income tax or making a decision on the choice of which regime is right for you can seem daunting. Consulting an expert can give you clarification and make the decision less stressful.

Choosing the right tax regime depends on your individual financial situation and tax liability. The old tax regime provides more deductions and exemptions, while the new tax regime has lower tax rates but fewer deductions and exemptions.

If you have a lot of deductions and exemptions, it may be beneficial to stick with the old tax regime. However, if you do not have many deductions and exemptions, the new tax regime may be more beneficial.

To determine which tax regime is best for you, you should calculate your tax liability under both regimes and then make a decision based on which option results in lower tax liability. It is also important to consider your long-term financial goals and the impact of choosing one regime over the other on your overall financial plan.

Consulting a tax professional or financial advisor is recommended to make an informed decision on which tax regime to choose.

Taxpayers are allowed to switch between the old and new tax regimes every fiscal year, except for those with business income. Taxpayers with business income are not permitted to switch between the two regimes each year. They can only opt for the new tax regime once.

Salaried taxpayers can choose the new tax regime at the beginning of the financial year 2023-24 and intimate their employer. The employee cannot change their choice anytime during the financial year.

1. Determine your gross taxable income for the financial year.
2. Identify eligible deductions and exemptions under the old regime.
3. Use applicable slab rates to calculate tax liability under the old regime.
4. Calculate tax liability under the new regime using applicable slab rates.
5. Compare tax liability under the old regime with the new regime.
6. Opt for the new regime if tax liability is lower.
7. Note that many old regime deductions and exemptions are not available under the new regime.

To accurately calculate your tax liabilities, it is recommended to use an online tax calculator. Seeking advice from a tax professional can also provide you with a better understanding and calculation.