The Indian taxation system went through a drastic change when finance minister Nirmala Sitaraman announced the budget for 2023. In this budget, she announced multiple changes in the old tax regime and created the new one. To everyone’s surprise, the new tax regime slab was declared the default one though the old one will continue to exist. However, the government created numerous incentives in the 2023 budget to support implementing the new income tax slab system.
The government introduced the new regime to simplify the taxation system. Taxpayers discover it more convenient and simpler to avail deductions and exemptions as well as maintain the records. Intending to ease such a burden on the taxpayers, the government brought the new regime. Under this system, the taxpayer need not bother about the deductions, make tax-saving investments, and analyze how to optimize the salary by lowering the taxable amount. A new regime is the right choice for those who want detailed tax planning.
New tax regime – More slabs with a lower tax rate
Three aspects pose the difference between the old and the new regime.
- According to the recent budget, the new tax system increased the number of new income tax slab rates to six. Subsequently, the available tax rates are now 0%, 5%, 10%, 15%, 20%, and 30% in the six slabs.
- The exemptions and deductions in the old regime are not available in the new one. The only common deduction in both regimes is a standard deduction of ₹ 50,000.
- According to the old regime, if the taxable income falls below ₹ five lakhs, then no tax will be levied on it, but according to the new regime, if the taxable income falls below ₹ seven lakhs, the entire payment will be tax-free.
Old tax – Higher rates with multiple options to reduce the burden
Let’s make a comparison between the old and the new regime. We will discover that the old one implemented higher tax rates, but it also offered many ways to reduce the taxpayer’s tax liability.
Over the years, the number of exemptions and deductions that fall under the old regime has increased. Thus, taxpayers can avail of more than 70 benefits to lower their tax burden.
What are exemptions and deductions?
Exemptions are part of the salary that will not be included under the taxable income—for example – House rent allowance (HRA), uniform allowance, etc. At the same time, deductions are the option that can help to lower the tax burden by investing or saving on specific schemes—for example – home loans, health insurance, etc.
Old tax regime v/s new tax regime – how to decide which one is better?
There is no specific answer to the question. It seems extremely difficult to make a comparison between the two. But a systematic approach can help to analyze well and conclude upon one best suitable option. The decision to switch between both options depends upon systematic calculations and analysis to draw the benefit from either one. One has to calculate a breakeven point for various income levels.
The breakeven point is where you find no difference in the tax liability between both regimes. Thus, if the total deductions and exemptions according to the old regime fall higher than the breakeven threshold of the income, then the taxpayer must stick to the old regime. On the contrary, if the breakeven point is higher, one must switch to the new regime.
Some estimations and conclusion
- The new regime is beneficial if the total deduction is less than 1.5 lakh.
- The old regime will be advantageous if the entire deduction exceeds 3.75 lahks.
- If the whole deduction ranges between 1.5 lahks to 3.75 lahks, then the option will be determined by your income level.
Hence it is pretty clear that opting for the best tax regime depends upon the income under which the old or new income tax slab does it fall, as well as the deduction and the exemption that one can acquire through the old regime, and those deductions are not available according to the new tax regime slab.
The following illustrations depict how two taxpayers with the same income are eligible for different tax deductions.
| Particulars | Taxpayer 1 | Taxpayer 2 |
| Annual income | 13,50,000 | 13,50,000 |
| House rent allowance (Exemption) | 1,20,000 | – |
| Leave travel allowance (Exemption) | 75,000 | – |
| Standard deduction | 50,000 | 50,000 |
| Deduction under section 80C | 1,50,000 | 1,50,000 |
Let us analyze which tax regime is more beneficial for both.
Taxpayer 1 (When taxpayer received HRA and LTA)
| Particulars | Old tax regime | New tax regime |
| Annual income | 13,50,000 | 13,50,000 |
| Less – Exemption – HRA | 1,20,000 | NA |
| Less – Exemption – LTA | 75,000 | NA |
| Less – Standard deduction | 50,000 | 50,000 |
| Less – Deduction under section 80C | 1,50,000 | NA |
| Net taxable income | 9,55,000 | 13,00,000 |
| Tax Amount | 1,03,500 (approx.) | 1,10,000 (approx.) |
| Tax |
Tax payer 2 – (No allowances are given to the taxpayer)
| Particulars | Old tax regime | New tax regime |
| Annual income | 13,50,000 | 13,50,000 |
| Less – Standard deduction | 50,000 | 50,000 |
| Less – Deduction under section 80C | 1,50,000 | NA |
| Net taxable income | 11,50,000 | 13,00,000 |
| Tax | 1,27,500 | 1,10,000 |
Conclusion
People often wonder to conclude on the best tax regime rate to choose. But both have different pros and cons that one must analyze before opting. The old one tries to inculcate the habit of saving in the individual, while the new one benefits the employee who earns less and invests less.
The new tax regime is safer, requires less recordkeeping, and minimizes tax evasion fraud. However, one must compare the two carefully before opting for one.
