Deciding Between the Old and New Tax Regime: A Comprehensive Guide
The introduction of the new tax regime in the budget 2020 aimed to simplify tax filing for Indian taxpayers. However, it wasn't warmly received due to the lack of certain exemptions and deductions. In response, budget 2023 brought significant changes to the new tax regime, making it more attractive and user-friendly. This blog will help you understand how to choose between the old tax regime and the new tax regime, considering the benefits and drawbacks of each.
A Brief Overview of the New Tax Regime
The new tax regime, launched in budget 2020, brought alterations to tax slabs, resulting in reduced tax rates. Initially, many taxpayers hesitated to opt for it due to the loss of exemptions and deductions like LTA, HRA, 80C, and 80D. In an effort to encourage acceptance, budget 2023 introduced several modifications to the new tax regime.
Key Changes in the New Tax Regime
- Increase in Tax Rebate Limit: The new tax regime raised the tax rebate limit to ₹7 lakhs, ensuring no tax liability for individuals earning ₹7 lakhs or less. Previously, this benefit was available only for income up to ₹5 lakhs in the old tax regime.
- Introduction of New Tax Slabs: The revised tax slabs under the new tax regime include:
- Up to ₹3,00,000: Nil tax
- ₹3,00,001 to ₹6,00,000: 5% tax
- ₹6,00,001 to ₹9,00,000: 10% tax
- ₹9,00,001 to ₹12,00,000: 15% tax
- ₹12,00,001 to ₹15,00,000: 20% tax
- ₹15,00,001 and above: 30% tax
- Reduction in Surcharge: The surcharge rate on income above ₹5 crores was reduced from 37% to 25% in the new tax regime.
- Increase in Leave Encashment Benefit: Non-government employees now enjoy an increased exemption limit of ₹25 lakhs on leave encashment under the new tax regime (previously ₹3 lakhs).
- Family Pension Deduction Benefit: Those receiving a family pension can avail a deduction benefit of either ₹15000 or 1/3rd of the pension earnings, considering the lower amount.
- Deduction in Salary Income: Salaried individuals are eligible for a standard deduction of ₹50000, which was previously available only in the old tax regime.
Significant Exemptions in the New Tax Regime
The new tax regime allows exemptions on various incomes, including agricultural income, leave encashment, life insurance income, scholarships, VRS proceeds up to ₹5 lakhs, standard deduction on rent, death cum retirement benefit, and retrenchment compensation.
Choosing Between Old Tax Regime and New Tax Regime
Selecting between the two regimes is not straightforward due to the complexities of India's taxation system. The decision must be made after comparing the final tax liability under each regime. Follow these steps:
- Calculate Exemptions: Calculate exemptions like HRA, LTA, food bills, etc., available under the old tax regime but taxed under the new tax regime.
- Consider Deductions: Take into account deductions like home loan interest, health insurance premium, house rent allowance, etc., available in the old tax regime but not in the new one.
- Compare Taxable Income: Deduct exemptions and deductions from your salary under both regimes to determine taxable income.
- Opt for the Lower Tax Liability: Compare both taxable incomes and choose the regime with the lower tax liability.
Estimated Scenarios:
- The new tax regime is beneficial if overall deductions are less than ₹1.50 lakhs.
- The old tax regime is advantageous if overall deductions exceed ₹3.75 lakhs.
Conclusion
A new tax regime was launched in budget 2020 but it was made more interesting in 2023. Various changes were made and incentives were brought in the new tax regime to make it more acceptable among taxpayers. Before deciding whether to go for the old tax regime or the new one, one needs to see which is more advantageous to them and then take the final decision.