Old VS New tax regime Which regime is better?

[Sparsh wadhwa]

The old tax regime and the new tax regime are two income tax regimes available to individual taxpayers in India. The old tax regime is the traditional income tax regime, while the new tax regime was introduced in 2020 with the aim of simplifying the tax system and reducing the tax burden on individual taxpayers.

Old tax regime

For the financial year 2023-24 (assessment year 2024-25), the income tax slab rates for individuals under the old tax regime are:

• Up to Rs. 2.5 lakhs – Nil
• Rs. 2.5 lakhs to Rs. 5 lakhs – 5%
• Rs. 5 lakhs to Rs. 10 lakhs – 20%
• Above Rs. 10 lakhs – 30%

Under the old tax regime, taxpayers are eligible for several deductions and exemptions, which can significantly reduce their taxable income and lower their tax liability.

One of the most significant deductions available under the old tax regime is under Section 80C of the Income Tax Act. This section allows taxpayers to claim a deduction of up to Rs. 1.5 lakhs for investments made in various instruments such as Public Provident Fund (PPF), National Savings Certificate (NSC), and Equity-Linked Saving Scheme (ELSS), among others. This deduction is particularly beneficial for taxpayers who make investments regularly and can help reduce their taxable income significantly.

Another deduction available under the old tax regime is under Section 80D, which allows taxpayers to claim a deduction for medical expenses incurred for themselves and their family members. This deduction can be up to Rs. 25,000 for individuals and Rs. 50,000 for senior citizens.

Similarly, taxpayers can claim a deduction for interest paid on a home loan for self-occupied property under Section 24 of the Income Tax Act. The deduction is available up to Rs. 2 lakhs for the interest paid on a home loan, which can help reduce the taxable income and lower the tax liability.

Apart from these deductions, taxpayers are also eligible for several exemptions such as the exemption for the Leave Travel Allowance (LTA), House Rent Allowance (HRA), and the exemption for the gratuity received by employees, among others. These exemptions can significantly reduce the taxable income and lower the tax liability for the taxpayer.

However, one of the downsides of the old tax regime is that the tax rates are higher compared to the new tax regime. The highest tax rate under the old tax regime is 30% for individuals earning over Rs. 10 lakhs. Additionally, taxpayers need to keep track of their investments and expenses to claim deductions and exemptions, which can be a tedious process.

New Tax Regime

The new tax regime was introduced in India with the aim to simplify the income tax structure and to reduce the tax burden on taxpayers. Under this regime, taxpayers have the option to choose between the old and new tax regime. The new tax regime provides a lower tax rate as compared to the old regime, but it comes with certain conditions and restrictions.

Here’s what you need to know about the new tax regime:

Income tax slab rates:

For the financial year 2023-24 (assessment year 2024-25), the income tax slab rates for individuals under the new tax regime are as follows:

• Up to Rs. 3 lakhs – Nil
• Rs. 3lakhs to Rs. 6 lakhs – 5%
• Rs. 6 lakhs to Rs. 9 lakhs – 10%
• Rs. 9 lakhs to Rs. 12 lakhs – 15%
• Rs. 12 lakhs to Rs. 15 lakhs – 20%
• Above Rs. 15 lakhs – 30%

Deductions and exemptions:

Under the new tax regime, taxpayers are not eligible for certain deductions and exemptions, deductions under Section 80C, Section 80D, etc. However, taxpayers can still claim certain deductions such as interest paid on home loans under Section 24, deductions under Section 80CCD(1B) for contributions made to the National Pension Scheme, etc. These deductions are subject to a maximum limit, and taxpayers cannot claim any other deductions or exemptions.

Optional regime:

The new tax regime is optional, which means that taxpayers can choose to pay taxes under either the old or new regime. However, taxpayers who opt for the new regime cannot switch back to the old regime in subsequent years.

Which Tax regime to choose:

The choice of tax regime depends on individual taxpayers’ tax liability and their eligibility for deductions and exemptions. Taxpayers with lower incomes and those who do not have significant investments or expenses that qualify for deductions and exemptions may find the new tax regime more beneficial. On the other hand, taxpayers with higher incomes and those with investments or expenses that qualify for deductions and exemptions may find the old tax regime more advantageous.

The author is an Income Tax and GST Practitioner and can be contacted at 9024915488.