Old Vs New Tax Regime

Tax season is upon us again in India, and with it comes the annual dilemma: which tax regime to choose? The Indian income tax system offers two distinct options: the New Tax Regime and the Old Tax Regime. Each one is designed for different financial situations. Understanding the differences between these regimes is important to ensure you pay the least amount of taxes.

This webpage will give an overview of the differences between the new tax regime and the old tax regime.

The last date to submit your Income Tax Return (ITR) for the Financial Year 2023-24 (Assessment Year 2024-25) without late fees is July 31, 2024. If you miss the deadline, you can still file a belated return before December 31, 2024.

New Tax Regime

The budget of 2020 introduced a new tax regime with lower tax rates. However, individuals who chose this new regime were unable to avail major deductions such as HRA, LTA, 80C, and others. As a result, fewer taxpayers chose this option. Therefore, in the 2023 Budget, significant changes were made to make the new tax regime deductions appealing.
Here is the New Tax Regime changes in Budget 2023:

  • Default Regime: The new tax regime is set as the default, and TDS (Tax Deducted at Source) calculation is done based on the new regime if no choice is made by the taxpayer.
  • Tax Rates: The basic exemption limit was raised to ₹3 lakhs from ₹2.5 lakhs, and the highest tax rate of 30% is levied on income above ₹15 lakhs.
  • Rebate Limit: Rebate under section 87A increased from ₹5 lakh to ₹7 lakh, and rebate benefits up to ₹25,000 are available if income doesn't exceed ₹7 lakhs.
  • Standard Deduction: Salaried individuals can claim a ₹50,000 deduction from their gross salary, and family pensioners can claim a ₹15,000 deduction from their pension income.
  • Reduced Surcharge: Surcharge on annual income above ₹5 crores reduced from 37% to 25%. The highest tax rate was reduced to 39% after this change.
  • Leave Encashment Exemption: Limit increased from ₹3lakhs to ₹25lakhs for non-government salaried employees.
  • Insurance Policies: Income from traditional policies with premiums of ₹5 lakh or more is now taxable.
  • Tax Slabs: The number of income tax slabs was reduced from 6 to 5 under the new regime.

The 2024 interim budget did not introduce any new tax changes for the fiscal year 2024-25. Finance Minister Nirmala Sitharaman decided to keep the current tax rates for both direct and indirect taxes, meaning that the adjustments made for the fiscal year 2023-24 will remain in effect. A complete budget is expected to be presented in July after the formation of the new government following the Lok Sabha elections.

Income Tax Slab Rate for New Tax Regime

Salary Range (in ₹) Tax Rate
Up to 3,00,000 Nil
3,00,001 to 6,00,000 5%
6,00,001 to 9,00,000 10%
9,00,001 to 12,00,000 15%
12,00,001 to 15,00,000 20%

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Old Tax Regime

The old regime offered 70 exemptions and deductions such as HRA and LTA, which could lower taxable income and reduce tax payments. One of the most widely used deductions was Section 80C, allowing for a reduction of taxable income by up to ₹1.5 lakh. Taxpayers were given the option to choose between the old and the new tax regime.

The comparison for the tax rates is as follows:

Income Tax Slab Old Tax Regime New tax Regime (Before budget 2023) New Tax Regime (After Budget 2023)
₹0 - ₹2,50,000 - - -
₹2,50,001 - ₹3,00,000 5% 5% -
₹3,00,001 - ₹5,00,000 5% 5% 5%
₹5,00,001 - ₹6,00,000 20% 10% 5%
₹6,00,001 - ₹7,50,000 20% 10% 10%

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Deductions & Exemptions of Old and New Tax Regimes

The old regime allows ₹3.5 lakh deduction (80C + 24b) while the new regime has no such deductions.

The table below shows a comparison of deductions on old and new tax regimes:

Particulars New Tax Regime Old Tax Regime
Gross Salary 700,000 700,000
Standard deduction Yes Yes
80C Deductions No Yes
Interest on Home Loan No Yes
80D Deductions/ All other No Yes

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From the above table, we understand that:

  • New regime is simpler and offers lower tax rates, but eliminates deductions for investments and expenses (80C, HRA, etc.).
  • Old regime allowed these deductions, which can significantly reduce your taxable income, but filing deductions are complex.

If you have high investments and claim many deductions, the old regime might save you deductions tax. If you have minimal deductions or prefer simplicity, the new regime could be better.

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Breakeven Threshold: New or Old Tax Regime

The break-even point is the amount of deductions you would need in the Old Regime to have the same tax liability as the New Regime. If your total deductions and exemptions under the old tax regime exceed the breakeven point for your income level, it is recommended to stick with the old system. Conversely, if the breakeven point is higher, switching to the new tax regime would be advantageous.

Salary (After Standard Deduction) Tax in Both Regimes Extra Deductions Needed in Old Regime (Break-Even Point) Best Tax Regime
₹6,50,000 ₹0 ₹1,50,000 New Regime
₹7,50,000 ₹36,400 ₹1,38,500 Old Regime if deductions > ₹1,38,500,
New Regime if deductions < ₹1,38,500
₹8,50,000 ₹41,600 ₹2,12,500 Old Regime if deductions > ₹2,12,500,
New Regime if deductions < ₹2,12,500
₹9,50,000 ₹54,600 ₹2,50,000 Old Regime if deductions > ₹2,50,000,
New Regime if deductions < ₹2,50,000
₹12,00,000 ₹93,600 ₹3,12,500 Old Regime if deductions > ₹3,12,500,
New Regime if deductions < ₹3,12,500

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From the above table, we understand that:

New Tax Regime is generally better if:

  • Your income after the standard deduction is lower (₹6.5 lakh and possibly ₹7.5 lakh).
  • You don't have many deductions to claim (less than the break-even point mentioned in the table).
  • You prefer a simpler filing process with no complex deduction calculations.

Old Regime might be better if:

  • You have significant deductions (like investments, home loan interest, and allowances) exceeding the break-even point for your income bracket.
  • Your income after the standard deduction is higher (₹12.5 lakh and above).

Note: It's recommended to calculate your taxes under both regimes for the most accurate decision. You can use an online income tax calculator or consult a tax advisor for help.

Income Tax Calculator

An income tax calculator assists individuals and organizations in estimating the amount of income tax they are obligated to pay. It considers various factors, such as taxable income, tax brackets, deductions, credits, and other tax-related details, to determine the estimated tax liability. This calculator helps users understand their tax obligations and plan their financial affairs accordingly.

You can also check other related income tax forms

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Frequently Asked Questions

Benefits of the New Tax Regime include Lower tax rates and a Simpler tax structure with fewer deductions and exemptions.

Income tax is generally lower in the New Tax Regime compared to the Old Tax Regime, due to the reduced tax rates.

The choice between the old and new tax regimes for salaried employees depends on their specific financial situation and the deductions/exemptions they can claim.

Yes, the tax slabs are different between the Old and New Tax Regimes, with the New Regime having lower tax rates.

The choice between the Old and New Tax Regimes depends on your financial situation and the deductions/exemptions you can claim.

Factors to consider include your income level, available deductions and exemptions, investment and savings goals, and overall financial situation.

The New Tax Regime may encourage more investment and savings, as the lower tax rates allow you to keep more of your income.

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