Which is Better Between Old Tax Regime and New Tax Regime?

The introduction of the recent budget of 2023 has left the taxpayers in a lot of confusion regarding whether to choose the old tax regime or opt for the new tax regime. Various incentives have been introduced in the new tax regime by the government so that more and more taxpayers opt for it. These changes are aimed at transitioning the taxpayers from the old tax regime to the new tax regime and eventually phasing out the old one. Now, the new tax regime has been set as default but the old tax regime will also continue to exist. In this blog, we will look at both the regimes and decide which one is better.

The new tax regime

The government introduced the new tax regime in the budget of 2020. In this, the tax slabs were changed and the taxpayers were given concessional tax rates. However, the taxpayers were denied several exemptions and deductions like the HRA, LTA, 80C and 80D and many more. Due to this, not many people opted for the new tax regime and the government had to make changes in it and re-introduce it in the budget of 2023. These are listed below:

Higher tax rebate limit

 Full tax exemption on income of up to 7 lakhs has been given under the new tax regime whereas in the old tax regime, this limit was up to an income of Rs 5 lakhs.

Streamlined tax slabs

The tax exemption limit was increased to rs 3 lakhs in the new tax regime. The tax slabs of the new tax regime are listed below:

1. For an income of up to 3 lacs, no rate of tax will be applied.
2. For income between 3 lakhs to 6 lakhs, a tax rate of 5% will be applied.
3. For an income lying between 6 lakh to 9 lakhs, a tax rate of 10% will be applied.
4. For an income lying between 9 lakhs to 12 lacs, a tax rate of 15% will be applied.
5. For an income lying between 12 lakhs to 15 lakhs, a tax rate of 20% will be applied.
6. For any income above 15 lakhs, a tax rate of 30% will be applied.

Standard and family pension deductions

1. Salary income: The standard deduction of Rs. 50,000 is allowed in both the old and new tax regimes. The standard deduction in addition to the rebate, makes around 7.5 lakhs as the tax-free income in the new tax regime.
2. Family pension: An individual who receives a family pension can claim for a deduction either of 15000 or of one third of the pension, whichever one is lower.
3. Reduction of surcharge for individuals having high net worth: The rate of surcharge on the income of more than 5 crores is reduced to 25% from 37%.

Higher leave encashment exemption

The limit of exemption for non Government employees has been changed to 25 lakhs from 3 lakhs.

Default regime

From financial year 2023-24 onward, the new tax regime will be set as the default tax regime. In order to continue using the old tax regime, the applicant will first have to submit a form at the time of filing the return.

The old tax regime

The old tax regime is the taxing system which was used before the new tax regime was introduced. In this regime, around 70 exemptions and reductions are available along with HRA and LTA, which help in reducing the taxable income and lower the amount of tax to be paid. The most generous reduction in the old tax regime was under section 80c, which allowed a reduction of taxable income up to Rs 1.5 lakhs. Now, the taxpayers get a choice between the old and the new tax regime.

What to choose: the new or the old tax regime?

The taxpayer has to decide whether to choose the new tax regime or remain in the old tax regime. This decision should be based on the tax saving deductions and exemptions for which the taxpayer is eligible in the old tax regime. The best method to compute which one is better, is to calculate a breakeven point for various levels of the income for a salaried individual who is below the age of 60 years.

Breakeven threshold

The amount where there is no difference between the text liability of two tax regimes is known as a break even point. If the total eligible deductions and exemptions are higher than the break even threshold in the older tax regime, then stick to the older one or opt for the new tax regime.

Tax under new and old regime

Some of the computations which will be of help to you in making the decision which one to choose; the old or the new tax regime are listed below:

1. When the total reductions are either less than or equal to 1.5 Lakh, then the new Regime will be beneficial.
2. The older Regime will be beneficial if the total deductions exceed 3.75 lakh.
3. And if the total elections are between 1.5 Lakh and 3.75 lakh, then the choice of the regime depends on the level of the taxpayer's income.

How to decide whether to opt for an old or new tax regime?

While making the decision of choosing one of the two tax regimes, the taxpayer must take in account the exemptions and deductions allowed under the regimes. The net taxable income can be determined by deducting all the eligible exemptions and deductions. By computing the tax liability using this net taxable income under the older tax regime, it becomes somewhat possible to compare the tax liabilities of both the regimes.

The logical approach in this regard would be to choose the regime which has a lower tax liability. The applicant must inform the employer about this choice, in order to ensure that the appropriate TDS is deducted from the salary.

Conclusion

In this blog, we discussed in detail the old and the new tax regime and which one is better. We discussed the differences between the two regimes, the break-even threshold in order to decide which one is better: the old or the new tax regime. We also discussed how to choose between the two.