Which is Higher New Or Outdated Tax Regime?


With the Union Price range of 2020, the Authorities of India tried to simplify the prevailing tax construction by introducing a brand new tax regime. This new construction didn’t have many takers, so within the Price range 2023, the Authorities introduced main modifications to the brand new tax regime to encourage greater adoption by taxpayers. There are main variations between the previous and the brand new tax regime, reminiscent of completely different tax slab charges and the therapy of deductions and exemptions. Earlier than you go for both, you have to perceive the intricacies to save lots of as a lot of your cash as potential.

The selection between the 2 buildings can confuse the taxpayers about their revenue tax slabs and relevant deductions and exemptions. On this weblog, we’re going to take an in depth take a look at the previous vs new tax regime so you may make an knowledgeable determination relating to which construction can successfully minimise your tax liabilities.

New Tax Regime

The New Tax Regime was launched by the federal government within the Union Price range 2020. In 2023, main modifications have been introduced to the brand new tax slab of revenue tax in order that extra people are inspired to undertake it. Listed here are some options of the brand new tax regime:

  • The essential exemption restrict is Rs. 3 lakh, which means no revenue tax must be paid on the primary three lakhs of your revenue. Earlier than the modifications, this restrict was Rs 2.5 lakh underneath the brand new regime. 
  • Underneath Part 87A, the tax rebate was once Rs. 5 lakh, which has been elevated to Rs. 7 lakh from the monetary yr 2023-24.
  • If somebody’s revenue is above Rs. 7 lakh, the next tax slabs are relevant:
Revenue Tax Fee
As much as Rs. 3 lakh None
Between Rs. 3 lakh and Rs. 6 lakh 5%
Between Rs. 6 lakh and Rs. 9 lakh 10%
Between Rs. 9 lakh and Rs. 12 lakh 15%
Between Rs. 12 lakh and Rs. 15 lakh 20%
Over Rs. 15 lakh 30%
  • Keep in mind that this tax system is progressive. Suppose somebody earns Rs. 8 lakh a yr. That doesn’t imply {that a} straight 10% tax of Rs. 8 lakh = Rs. 80,000 will probably be levied. The revenue will fairly be divided into elements after which calculated. Right here is an easy instance – 
  • Tax on the primary Rs. 3 lakh: 0
  • Tax on the following Rs. 3 lakh: 5% of Rs. 3 lakh = Rs. 15,000
  • Tax on the primary Rs. 2 lakh: 10% of Rs. 2 lakh = Rs. 20,000.
  • Thus, whole tax on revenue of Rs. 8 lakh = Rs. 15,000 + Rs. 20,000 = Rs. 35,000.

(Notice that it is a easy instance with out normal deduction or cess to showcase progressive taxation)

  • The brand new tax regime permits salaried taxpayers to say a typical deduction of Rs. 50,000.
  • A typical deduction of Rs 15,000 may be claimed by people receiving a household pension.
  • For HNIs (Excessive-Web-Value People) the surcharge over Rs. 5 crore revenue has additionally seen a discount from 37% to 25%. 
  • Beforehand, the exemption restrict on go away encashment for non-government salaried people was Rs. 3 lakh. With the change in 2023, the restrict was elevated to Rs. 25 lakh. 
  • Some of the vital features of the brand new tax regime is that it doesn’t permit people to say numerous exemptions and deductions reminiscent of those underneath Part 80C, 80D, 80E, 80G, and others of the Revenue Tax Act, and likewise different tax advantages reminiscent of Home Lease Allowance (HRA) and Go away Journey Allowance (LTA). It’s essential to contemplate this issue earlier than deciding between the brand new vs previous tax regime. 
  • From FY 2023/24, the brand new tax regime was set because the default regime for taxpayers. In case you don’t particularly inform your employer you’re choosing the previous regime, the TDS calculation in your wage will probably be finished on the idea of the brand new regime. 

Additionally Learn: Key Benefits of Tax Planning

Outdated Tax Regime

The Outdated Tax Regime has greater tax charges in comparison with the brand new regime, however due to the various deductions and exemptions that may be claimed underneath this technique, one can considerably scale back their tax liabilities. Listed here are some examples of the tax advantages underneath the previous regime: 

  • Underneath Part 80C of the Revenue Tax Act, one can declare deductions of as much as Rs. 1.5 lakh by investing in devices such because the Public Provident Fund, Worker Provident Fund, Fairness-Linked Financial savings Scheme, and Unit-Linked Insurance coverage Plans. 
  • Advantages by investing in Submit Workplace Schemes reminiscent of Sukanya Samriddhi Yojana, Nationwide Financial savings Certificates, and Senior Residents Financial savings Scheme.
  • Exemptions on Go away Journey Allowance and Home Lease Allowance.
  • Deductions on premiums paid in the direction of life insurance coverage.
  • Advantages on for premiums paid in the direction of one’s medical health insurance in addition to premiums paid in the direction of the medical health insurance of 1’s mother and father underneath Part 80D.
  • Advantages on repayments made in the direction of a house mortgage. 
  • A typical deduction of Rs. 50,000 is allowed for salaried taxpayers, similar to the brand new tax regime.
  • General, the previous tax regime provides over 70 deductions and exemptions. 

Listed here are the revenue tax slabs for the previous regime:

Revenue Tax Fee
As much as Rs. 2.5 lakh None
Between Rs. 2.5 lakh and Rs. 5 lakh 5%
Between Rs. 5 lakh and Rs. 10 lakh 20%
Above Rs. 10 lakh 30%

A easy instance of how tax is calculated underneath the previous regime (with out cess and normal deduction): Suppose a person has a wage of Rs. 9 lakh.

  • No tax on the primary Rs. 2.5 lakh.
  • Tax on the following Rs. 2.5 lakh, 5% of Rs. 2.5 lakh = Rs. 12,500
  • Tax on the following Rs. 4 lakh, 20% of Rs. 4 lakh = Rs. 80,000.
  • Whole tax on revenue of Rs. 9 lakh = Rs. 12,500 + Rs. 80,000 = Rs. 92,500

If you’re utilizing this construction to file your taxes, keep in mind to specify you’re choosing the previous tax regime as a result of the default between the previous regime vs new regime is the brand new one. Earlier than the due date, submit your revenue tax return together with Kind 10-IEA.

Now that you understand the fundamentals of each tax buildings, let’s evaluate the previous vs new tax regime.

Additionally Learn: Tricks to Save Revenue Tax on Wage

Distinction Between Outdated Vs New Tax Regime: Which is Higher?

Let’s mix the revenue tax slabs to get a greater understanding of recent regime vs previous regime calculation:

Revenue Outdated Tax Regime Fee New Tax Regime Fee
As much as Rs. 2.5 lakh  None None
Between Rs. 2.5 lakh and Rs. 3 lakh 5% None
Between Rs. 3 lakh and Rs. 5 lakh 5% 5%
Between Rs. 5 lakh and Rs. 6 lakh 20% 5%
Between Rs. 6 lakh and Rs. 7.5  lakh 20% 10%
Between Rs. 7.5 lakh and Rs. 9 lakh 20% 10%
Between Rs. 9 lakh and Rs. 10 lakh 20% 15%
Between Rs. 10 lakh and Rs. 12 lakh 30% 15%
Between Rs. 12 lakh and Rs. 15 lakh 30% 20%
Above Rs. 15 lakh 30% 30%

Moreover, 

Outdated Tax Regime New Tax Regime
Tax charges are greater. Tax charges are decrease
Presents many exemptions and deductions that may considerably scale back tax legal responsibility.  Doesn’t provide as many deductions and exemptions in comparison with the previous tax regime.
The tax submitting course of is slightly complicated. Simplifies the tax submitting course of.

So previous regime vs new regime, which one is best? Effectively, as you’ll be able to see each the regimes have their execs and cons. The higher regime is in fact whichever lets you maintain probably the most of your hard-earned cash, which finally is determined by your distinctive monetary state of affairs and funding and insurance coverage technique. Thus, the brand new tax regime vs previous doesn’t have one particular reply. You should utilize tax calculators on-line to find out which of the 2 regimes will will let you maximise your tax financial savings. 

However let’s take one other instance: We are going to calculate the tax legal responsibility of a salaried particular person with an annual revenue of Rs. 12 lakh underneath each tax regimes – previous and new.

New Tax Regime Calculation:

A typical deduction of Rs. 50,000 will apply right here, so the taxable revenue is Rs. 11,50,000.

  • No tax on the primary Rs. 3 lakh.
  • Tax on the following Rs. 3 lakh: 5% of Rs. 3 lakh = Rs. 15,000
  • Tax on the following Rs. 3 lakh: 10% of Rs. 3 lakh = Rs. 30,000.
  • Tax on the following Rs. 2.5 lakh: 15% of Rs. 2.5 lakh = Rs. 37,500
  • Whole = Rs. 15,000 + Rs. 30,000 + Rs. 37,500 = Rs. 82,500.
  • A cess of 4% is charged once more: 4% of Rs. 82,500 = Rs. 3,300
  • Whole tax on revenue of Rs. 12 lakh = Rs. 15,000 + Rs. 30,000 + Rs. 37,500 + Rs. 3,300 = Rs. 85,800

Outdated Tax Regime Calculation:

A typical deduction of Rs. 50,000 will apply right here as effectively, so the taxable revenue is once more Rs. 11,50,000.

  • No tax on the primary Rs. 2.5 lakh.
  • Tax on the following Rs. 2.5 lakh, 5% of Rs. 2.5 lakh = Rs. 12,500
  • Tax on the following Rs. 5 lakh, 20% of Rs. 5 lakh = Rs. 1,00,000.
  • Tax on the following Rs. 1.5 lakh, 30% of Rs. 1.5 lakh = Rs. 45,000
  • Whole = Rs. 12,500 + Rs. 1,00,000 + Rs. 45,000 = Rs. 1,57,500
  • A cess of 4% is charged: 4% of Rs. 1,57,500 = Rs. 6,300
  • Whole tax on revenue of Rs. 12 lakh = Rs. 12,500 + Rs. 1,00,000 + Rs. 45,000 + Rs. 6,300 = Rs. 1,63,800

Lastly, the entire tax quantity underneath the previous regime is Rs. 1,63,800 and the quantity underneath the brand new regime is Rs. 85,800. In fact, this isn’t taking into consideration the largest benefit of the previous regime – the deductions and exemptions. 

Now suppose somebody has invested Rs. 1.5 lakh in 80C investments, contributed Rs. 50,000 in the direction of NPS, paid Rs. 40,000 on schooling mortgage curiosity and Rs. 50,000 on house mortgage curiosity, and donated Rs. 20,000 to charity. This can apply a Rs. 3,10,000 deduction underneath Chapter VI A. So calculating once more underneath the previous regime: 

  • Taxable revenue: Rs 12,00,000 – Rs. 50,000 (normal deduction) – Rs. 3,10,000 (Chapter VI A deduction) = Rs. 8,40,000
  • No tax on the primary Rs. 2.5 lakh.
  • Tax on the following Rs. 2.5 lakh, 5% of Rs. 2.5 lakh = Rs. 12,500
  • Tax on the following Rs. 3.4 lakh, 20% of Rs. 3.4 lakh = Rs. 68,000
  • Whole = Rs. 12,500 + Rs. 68,000 = Rs. 80,500
  • Cess of 4% is charged: 4% of Rs. 80,500 = Rs. 3,220
  • Whole tax due: Rs. 80,500 + Rs. 3,220 = Rs. 83,720

Now the tax is decrease than the brand new regime! 

That is simply an instance. In case your whole deduction quantity is lower than Rs. 1.5 lakh, the brand new regime could also be extra suited to you. If in case you have maximised your deductions they usually exceed Rs. 3.75 lakh, then the previous regime could also be extra suited to you. Any deduction whole between Rs. 1.5 lakh and Rs. 3.75 lakh, and your optimum regime will rely upon how a lot your taxable revenue is. 

Moreover, if you wish to file your taxes with none problem, you’ll be able to go for the brand new tax regime because it doesn’t contain complicated deductions and exemptions calculations. In case you’ve closely invested in tax-saving devices and may declare a tax profit equal to roughly Rs. 4.5 lakh or 40% of your annual revenue, whichever is decrease, then selecting the previous tax regime will present higher long-term advantages.

Exemptions underneath new tax regime

Whereas the brand new tax regime doesn’t present as many exemptions and deductions because the previous tax regime, some advantages nonetheless apply:

  • Commonplace deduction of Rs. 50,000 for salaried people.
  • Commonplace deduction on lease is relevant.
  • Exemption on revenue from life insurance coverage and agricultural farming.
  • Compensation on retrenchment.
  • Exemption on go away encashment upon retiring.
  • As much as Rs. 20 lakh gratuity acquired from the employer is exempt.
  • Exemptions on employer contribution in the direction of EPF and Nationwide Pension System (NPS).
  • Exemption on cash acquired as a scholarship.
  • Curiosity earned and maturity on the Public Provident Fund and Sukanya Samriddhi Yojana are exempt. 
  • Voluntary Retirement Scheme (VRS) proceeds as much as Rs. 5 lakh are exempt, and extra.

New tax regime: Professionals and cons

Listed here are some benefits and drawbacks of the brand new tax regime:

Professionals Cons
Tax charges are decrease. Doesn’t permit taxpayers to say as many deductions and exemptions because the previous tax regime.
Makes tax calculation simpler whereas lowering the burden of compliance. Doesn’t encourage people to save lots of and make investments as a lot because the previous regime. The deductions incentivise people to speculate.
Permits people to discover completely different funding alternatives as they aren’t restricted by particular deductions.  Switching again to the brand new tax regime after opting out might show difficult for people with enterprise {and professional} revenue. Such people have a one-time alternative.

Conclusion

Deciding between the previous regime and the brand new regime generally is a powerful alternative. When you’re making a call, you shouldn’t simply maintain your taxable revenue in thoughts, but additionally the exemptions and deductions underneath the 2 buildings that will let you save as a lot of your cash as potential. As a result of there are such a lot of tax advantages given within the Revenue Tax Act, one can simply miss out on a couple of and never take full benefit of the alternatives out there. That’s why it is very important seek the advice of a tax advisor earlier than you file your taxes. A tax advisor calculates your tax legal responsibility on each previous and new regimes and suggests the most effective path to take. As a result of paying taxes is a yearly obligation, the cash an expert can assist you save over many years is critical. Furthermore, a tax advisor can maintain you up to date on the modifications in tax legal guidelines and enable you to establish alternatives that may lead you to extra tax advantages. 

FAQs:

Which is best previous tax regime or the brand new tax regime?

The selection between the previous tax regime and the brand new tax regime is determined by one’s distinctive monetary circumstances. Whereas you will get decrease revenue tax charges by choosing the brand new tax regime, additionally, you will should forgo the exemptions and deductions within the previous tax regime. Earlier than you file your taxes, you’ll be able to take recommendation from a tax planner to decrease your tax legal responsibility as a lot as potential.

Which tax regime is best for 10 lakhs CTC?

Not counting normal deductions, in case your whole deductions are greater than Rs. 2.6 lakh and you’ve got invested closely in tax saving schemes, then the previous regime is extra appropriate. In case you don’t have a variety of funding in tax-saving schemes and your whole deductions are lower than Rs. 2.6 lakh, then you’ll be able to go for the brand new regime. 

What’s the distinction between the previous and new tax regime 24?

The previous tax regime is the previous tax construction which permits taxpayers to say a variety of deductions and exemptions given within the Revenue Tax Act. The brand new tax regime however was launched in 2020 which permits taxpayers to pay tax at decrease charges in comparison with the previous construction. But when somebody opts for the brand new regime, in addition they should forgo deductions and exemptions given in Part 80C, 80D, and different advantages like HRA and LTA. 

Is new tax regime higher for salaried workers?

Whether or not or not the brand new tax regime is best for salaried workers is determined by their monetary state of affairs. If a salaried worker has made investments in Part 80C exempt devices just like the Nationwide Pension Scheme, they won’t get any tax advantages underneath the brand new regime however will underneath the previous regime. If a salaried worker has made minimal investments in devices that give advantages solely underneath the previous regime, they will go for the brand new regime. 

Can I swap between the previous and new tax regime?

Sure, once you file your taxes yearly, you have got the choice to decide on between the previous and new tax regimes. In case you select the brand new tax regime, you can’t declare the advantages underneath the previous regime for that exact yr. Subsequent yr you’ll be able to swap to the previous regime do you have to want. Individuals with enterprise {and professional} revenue, nonetheless, can solely swap as soon as.

Are there any limitations to the brand new tax regime?

Sure, whereas the brand new tax regime provides decrease revenue tax charges in comparison with the previous regime, it additionally gained’t will let you declare numerous deductions and exemptions given underneath Sections 80C, 80D, 80E, 80G, and others of the Revenue Tax Act. Additionally, advantages reminiscent of Home Lease Allowance (HRA) and go away journey allowance (LTA) will not be relevant underneath the brand new tax regime, so it could restrict your tax-saving alternatives.

Can I declare deductions underneath each the previous and new tax regimes?

No, once you file your taxes every monetary yr, it’s important to decide one between the previous and the brand new tax regimes.



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