The Indian government is promoting a simplified income tax system for salaried individuals. Introduced in the 2020 budget, the new tax regime offers lower tax rates but fewer deductions compared to the traditional system. While both options remain available, recent changes have made the new tax regime more appealing.
Understanding the Two Regimes
- The old tax regime allows taxpayers to reduce their taxable income by claiming deductions for various expenses like home loans, investments, and certain expenditures. However, navigating these deductions can be complex.
- In contrast, the new tax regime offers a simpler approach with lower tax rates. However, most deductions and exemptions available under the old regime are not allowed in the new system.
Old vs New Tax Regime: Which One to Go For?
“Coming to Personal Income Tax Rates, I have two announcements to make for those opting for the new tax regime…as a result of these changes, a salaried employee in the new tax regime stands to save up to Rs 17,500/- in income tax,” Finance Minister Nirmala Sitharaman announced during her Union Budget 2024 speech.
In short, to compensate, the government increased the standard deduction and adjusted tax slabs for the new regime. These changes can translate to tax savings of up to ₹17,500 for those who switch.
10 Important Points to Consider While Choosing Tax Regime
Who Benefits Most?
The new regime seems particularly appealing to younger taxpayers with limited investment opportunities and those who don’t own a home. They can take advantage of the lower tax rates without being impacted by the lack of deductions.
However, individuals who have planned their investments and finances around deductions offered under the old system may find it difficult to switch. This includes people with home loans or those who invest a lot to reduce their taxes.
Deductions Not Allowed Under the New Income Tax Regime
Comparing the Regimes
When comparing the old and new tax systems, the old regime offers tax benefits through deductions and rebates, but it has a more complicated filing process. It has different tax rates for different income brackets, with exemptions for senior citizens.
On the other hand, the new regime has lower tax rates and aims to eliminate most deductions. It has recently increased the standard deduction and adjusted the tax brackets. This creates a five-tier tax structure with a lower starting bracket and a maximum tax rate.
Key Deductions Allowed Under the New Tax Regime
Making an Informed Choice
Taxpayers should carefully consider their income, deductions, and financial goals before deciding between the two regimes. Those with substantial deductions under the old regime might find it more advantageous to retain the traditional system. However, individuals with limited deductions or a preference for simplicity may benefit from the new regime.
New Income Tax Slab Rates for FY 2023-24
