In recent times, India’s taxation system has undergone a major transformation with the introduction of the new tax regime. This change has left many individuals confused about whether to stick with the old tax regime or switch to the new one. In this blog, we aim to simplify the complex changes in India’s tax landscape and explain how they can impact you financially.
Table of Contents
- Let’s Understand the New Tax Regime
- Pros of the New Tax Regime:
- Cons of the New Tax Regime:
- Let’s Understand the Old Tax Regime
- Advantages of the Old Tax Regime:
- Disadvantages of the Old Tax Regime:
- Let’s Understand This With An Example
- Income Tax Calculation Under the Old Tax Regime
- Income Tax Calculation Under the New Tax Regime
- Is It Possible to Switch Between the New Tax Regime and the Existing One?
Let’s Understand the New Tax Regime
The new tax regime in India introduced a simplified tax structure that offers taxpayers the option to pay taxes at lower rates. However, they can’t claim various deductions and exemptions available under the old tax regime like house rent allowance, standard deductions, or certain investment-related benefits.
New Tax Regime Slab (FY 2022-23) (AY 2023-24)
|Income Tax Slab||Income Tax Rate|
|Up to ₹ 2,50,000||Nil|
|₹ 2,50,001 – ₹ 5,00,000||5% above ₹ 2,50,000 (tax rebate u/s 87A is available)|
|₹ 5,00,001 – ₹ 7,50,000||₹ 12,500 + 10% above ₹ 5,00,000|
|₹ 7,50,001 – ₹ 10,00,000||₹ 37,500 + 15% above ₹ 7,50,000|
|₹ 10,00,001 – ₹ 12,50,000||₹ 75,000 + 20% above ₹ 10,00,000|
|₹ 12,50,001 – ₹ 15,00,000||₹ 1,25,000 + 25% above ₹ 12,50,000|
|Above ₹ 15,00,000||₹ 1,87,500 + 30% above ₹ 15,00,000|
Under the new tax regime, taxpayers are not eligible for certain common exemptions that are available under the old tax regime. However, there is good news for salaried individuals as the Finance Minister has introduced an additional benefit. They can now deduct an extra ₹50,000 from their income as a standard deduction when calculating their taxes. This change aims to provide some relief to salaried taxpayers under the new tax regime.
Note: The above tax slabs are applicable for those with taxable income above ₹ 7 lakh. There will be no tax for those with taxable income below ₹ 7 lakh, as per the latest announcement in Union Budget 2023.
Pros of the New Tax Regime:
- Beneficial for Lower Income Earners: The new tax regime is advantageous for individuals earning up to ₹7 lakh or those who have higher incomes but are unable to claim tax benefits amounting to at least ₹4.5 lakh. It provides them with a simplified tax structure.
- Simpler Tax Calculation and Documentation: The new tax regime offers a simplified tax calculation process, making it easier for individuals to understand and comply with their tax obligations. Additionally, it requires little to no documentation, reducing the administrative burden.
Cons of the New Tax Regime:
- Limited Exemptions: If you intend to claim a high amount of exemptions, the new tax regime may not be the best choice for you. It eliminates several common deductions and exemptions available under the old tax regime, potentially reducing your overall tax savings.
- Lack of Incentives for Savings: The new tax regime does not provide specific incentives for taxpayers to save, such as in Equity Linked Savings Scheme (ELSS) or Public Provident Fund (PPF) schemes. If you prioritize tax-saving investments, the old tax regime may be more suitable for you as it allows for these deductions and exemptions.
Read: ELSS vs PPF
Let’s Understand the Old Tax Regime
The old tax regime refers to the existing tax system in India where taxpayers can claim various exemptions, deductions, and allowances to reduce their taxable income. These deductions are available under different sections of the Income Tax Act, such as Section 80C for specific investments, Section 80D for health insurance premiums, Section 24 for home loan interest, and allowances like House Rent Allowance (HRA) and Leave Travel Allowance (LTA).
Old Tax Regime Slab (FY 2022-23) (AY 2023-24)
|Income Tax Slab||Income Tax Rate|
|Up to ₹ 2,50,000||Nil|
|₹ 2,50,001 – ₹ 5,00,000||5% above ₹ 2,50,000|
|₹ 5,00,001 – ₹ 10,00,000||₹ 12,500 + 20% above ₹ 5,00,000|
|Above ₹ 10,00,000||₹ 1,12,500 + 30% above ₹ 10,00,000|
Note: Opting for old tax regime allows you to claim a long list of exemptions, some of which are listed below: Exemption of income up to ₹ 1.5 lakh under Section 80C of the Income Tax Act. This allows in pension funds (EPF, PPF), select mutual funds (ELSS), ULIPs, tax saving fixed deposits or other saving schemes such as National Savings Certificate, Sukanya Samriddhi Yojana, Senior Citizens Savings Scheme etc. Spending on life insurance, principal repayment made towards home loan or tuition fee for child can also be considered for exemption under Section 80C.
Advantages of the Old Tax Regime:
- Option for Exemptions and Deductions: In the old tax regime, you have the choice to claim various exemptions and deductions. This helps in reducing your taxable income and saving on taxes.
- Better Investment Opportunities: Certain investments like PPF, NPS, and ELSS are eligible for tax deductions. This means you not only save on taxes but also have the chance to grow your investments.
- Familiarity: The old tax regime has been around for a long time, so it’s something you may already be familiar with. You can continue following the existing tax rules and practices that you’re used to.
Disadvantages of the Old Tax Regime:
- Complexity: The old tax regime can be complex, making it difficult to understand and comply with all the tax laws. This complexity may make it challenging for you to accurately calculate your taxes and claim the right exemptions.
- Limited Flexibility: Once you make your investments and claim deductions in the old tax regime, you usually can’t change your tax plan during the year. This lack of flexibility may restrict your ability to optimize your tax-saving strategies based on your changing needs or financial goals.
Note: To determine which regime is better for you, consider the following factors: Your income level and the availability of eligible deductions and exemptions. Your financial goals and the potential tax savings under each regime. Your preference for simplicity and ease of compliance versus the potential benefits of tax planning.
Let’s Understand This With An Example
Ritika earns a yearly salary of Rs. 15,00,000. She lives in a rented apartment in Gurgaon and pays a monthly rent of Rs. 30,000. Her monthly salary includes an HRA of Rs. 40,000, Special Allowances of Rs. 20,000, and an annual Leave Travel Allowance of Rs. 20,000. To find her total income, we need to add up all these amounts.
|Details||Amount||Exemptions||Taxable Income as per the Old Regime||Taxable Income as per the New Regime|
|Basic Income||Rs. 15,00,000||–||Rs. 15,00,000||Rs. 15,00,000|
|House Rent Allowance||Rs. 4,80,000||Rs. 3,60,000||Rs. 1,20,000||Rs. 4,80,000|
|Special Allowance||Rs. 2,40,000||–||Rs. 2,40,000||Rs. 2,40,000|
|Leave Travel Allowance (LTA)||Rs. 20,000||Rs. 16,000||Rs. 4,000||Rs. 20,000|
|Standard Deductions||–||Rs. 50,000||Rs. 50,000||Rs. 50,000|
|Net Salaried Income||–||–||Rs. 18,14,000||Rs. 21,90,000|
To calculate the exact income tax, you need to include the income from all the sources, such as:
- Income from salary (paid to you by the employer)
- Income from capital gains (gains from buying and selling of house or shares)
- Income from house property (income from rental property)
- Income from other businesses (freelanicng etc)
- Income from any other source (FD, bonds etc)
Now, let’s assume Ritika has an FD and earns an annual interest Rs. 14,000 from it. She also earns interest income of Rs. 10,000 p.a. from her savings account. Some important investments made by her to save tax are:
- ELSS (Equity Linked Savings Scheme) funds of Rs. 20,000
- PPF (Public Provident Fund) investment of Rs. 50,000
- Medical insurance of Rs. 15,000
- LIC premium of Rs. 10,000
Income Tax Calculation Under the Old Tax Regime
|Details||Amount (in Rs.)||Total (in Rs.)|
|Other Sources Income||24,000||–|
|Gross Total Income||–||18,38,000|
|Gross Taxable Income||–||16,63,000|
|Total tax (including cess)||–||Rs. 3,23,856|
Income Tax Calculation Under the New Tax Regime
|Up to 3,00,000||Exempt from tax||NIL|
|Rs. 3 lakhs – Rs. 6 lakhs||5% [5% of (Rs. 6 lakhs – Rs. 3 lakhs)]||Rs. 15,000|
|Rs. 6 lakhs – Rs. 9 lakhs||10% [10% of (Rs. 6 lakhs – Rs. 9 lakhs)]||Rs. 30,000|
|Rs. 9 lakhs – Rs. 12 lakhs||15% [15% of (Rs. 9 lakhs — Rs. 12 lakhs)]||Rs. 45,000|
|Rs. 12 lakhs – Rs. 15 lakhs||20% [20% of (Rs. 12 lakhs – Rs. 15 lakhs)]||Rs. 60,000|
|Rs. 15 lakhs & Above||30% [30% of (21,90,000 -15,00,000)]||Rs. 2,07,000|
|Cess||4% of total tax [4% of (Rs. 15,000 + Rs. 30,000+ Rs. 45,000 + Rs. 60,000 + Rs 2,07,000)]||Rs. 14,280|
|Total Income Tax||–||Rs. 3,71,280|
Let’s consider an individual with a salary of Rs. 18,14,000 and other sources of income amounting to Rs. 24,000. Under the old tax regime, after considering deductions of Rs. 1,75,000 (including Section 80C, 80D, and 80TTA), the individual’s gross taxable income comes out to be Rs. 16,63,000. The total tax liability, including cess, is Rs. 3,23,856.
Under the new tax regime, exemptions are provided based on income slabs. For this example, let’s assume the individual falls under the income slabs as follows:
- Up to Rs. 3 lakhs: Exempt from tax
- Rs. 3 lakhs – Rs. 6 lakhs: 5% tax (5% of (Rs. 6 lakhs – Rs. 3 lakhs) = Rs. 15,000)
- Rs. 6 lakhs – Rs. 9 lakhs: 10% tax (10% of (Rs. 6 lakhs – Rs. 9 lakhs) = Rs. 30,000)
- Rs. 9 lakhs – Rs. 12 lakhs: 15% tax (15% of (Rs. 9 lakhs – Rs. 12 lakhs) = Rs. 45,000)
- Rs. 12 lakhs – Rs. 15 lakhs: 20% tax (20% of (Rs. 12 lakhs – Rs. 15 lakhs) = Rs. 60,000)
- Above Rs. 15 lakhs: 30% tax (30% of (Rs. 21,90,000 – Rs. 15,00,000) = Rs. 2,07,000)
In addition, a cess of 4% is applied to the total tax amount, resulting in Rs. 14,280. Hence, the total income tax under the new tax regime is calculated as Rs. 3,71,280.
Based on the given information, it can be observed that the total income tax liability is higher under the new tax regime compared to the old tax regime. However, the new tax regime offers a simplified structure with predefined tax rates based on income slabs, eliminating the need for deductions and exemptions. The choice between the two regimes depends on individual circumstances, financial goals, and the impact of deductions available under the old regime. It is advisable to evaluate the tax implications and consult a tax professional for personalized advice.
Is It Possible to Switch Between the New Tax Regime and the Existing One?
Yes, individuals can switch between the new tax regime and the old tax regime. The income tax department allows taxpayers the flexibility to choose the tax regime that best suits their financial situation each year.
Taxpayers can switch between the two regimes on an annual basis. However, once a choice is made for a specific financial year, it cannot be changed for that year.
In short, The choice between the old and new tax regimes impacts your tax liability and financial planning. Consider your specific financial circumstances, including investments, deductions, and exemptions, to determine which regime aligns better with your financial goals and tax-saving strategies. Evaluate the tax liabilities under both regimes and make an informed decision based on your individual needs and objectives.
Nothing on this blog constitutes investment advice, performance data or any recommendation that any security, portfolio of securities, investment product, transaction or investment strategy is suitable for any specific person. You should not use this blog to make financial decisions. We highly recommend you seek professional advice from someone who is authorised to provide investment advice.