scorecardresearchBudget 2023: What are new and old income tax regimes? Which one should you opt for?

Budget 2023: What are new and old income tax regimes? Which one should you opt for?

Updated: 12 Jan 2023, 06:54 PM IST
TL;DR.
The key distinction between the two tax regimes is that the old one permits taxpayers to claim all deductions and exemptions while the new one does not offer any such benefits and levies a lower tax rate. We share more details here.
The exemptions and deductions that are not allowed in the new tax regime include house rent allowance (HRA), interest on home loan and investments made under Section 80C

The exemptions and deductions that are not allowed in the new tax regime include house rent allowance (HRA), interest on home loan and investments made under Section 80C

Rarely does it happen that the Income Tax (I-T) department allows taxpayers to choose any of the two tax slabs they want to use based on which one suits them more. This is precisely what is in force in India as of now.

In 2020, the Government of India introduced a new tax regime, without phasing out the old one, wherein taxpayers are allowed to pay taxes at a lower rate, but there is a small catch. The taxpayers are restrained from availing of a number of exemptions which were allowed in the earlier regime.

So, the key distinction between the two tax regimes is that the old one allows taxpayers to claim all deductions and exemptions, while the new one does not. At the same time, the tax rates in the new tax regime are lower, hence, compensating for the missing exemptions. 

“Opting for the New tax regime robs off almost 70 deductions available to the taxpayers in the old regime. Salaried people are either living on rent which allows them to claim HRA or have their own home for which they are repaying loan principal or interest which also allows them for deduction from their taxable income. However, one should still calculate for themselves if the new regime is beneficial for them or the old one,” says Chartered Accountant Kanan Bahl, growth consultant for fintechs and AMCs.

The exemptions and deductions that are not allowed in the new tax regime entail house rent allowance (HRA), interest on home loans and investments under Section 80C of the Act. The deductions allowed under Section 80C include investments in Public Provident Fund (PPF) and National Savings Certificates (NSCs), paying LIC premiums and five-year deposits with banks.

Optional tax regime

It is interesting to note that the new tax regime is optional, thus, allowing taxpayers to continue with the old tax regime if needed. As a matter of fact, Union Finance Minister Nirmala Sitharaman recently said that the government brought in the optional income tax regime with seven tax slabs to ensure lower rates for those in the low-income bracket.

There were six slabs in the old tax regime versus seven slabs in the new tax regime.

Income bracket       Old regime New regime
Up to 2.5 lakh            Nil Nil
2.5-5 lakh              5% 5%
5-7.5 lakh                      20%10%
7.5-10 lakh                  20%15%
10-12.5 lakh                30%20%
12.5-15 lakh                30%25%
Above 15 lakh 30%30%

As one can see in the table above, in the new tax slab, there is no tax up to 2.5 lakh. For an income between 2.5 lakh to 5 lakh, the tax rate is 5 per cent.

For income between 5-7.5 lakh, the tax rate is 10 per cent, for 7.5 lakhs to 10 lakhs, the tax rate increases to 15%, for 10 lakhs to 12.5 lakhs, the tax rate is 20%, for 12.5 lakhs to 15 lakhs, the rate increases to 25% and the maximum rate of 30 per cent is applicable when income increases to 15 lakhs.

Which tax regime should one choose?

There is no one-size-fits-all approach. So, whether you choose the old or new regime depends on a number of factors: The income bracket you fall under and the amount of tax-exempt savings you have made during the financial year.

ALSO READ: Choosing between the old and the new tax regime

For instance, by moving to a lower tax bracket, if your total savings amount to 10,000 but you have to let go of your tax exemptions of a higher amount -- then it would not be ingenious to opt for the new regime.

On the other hand, if you do not want to make investments of over one lakh purely to avail of tax benefits, then it is advisable to opt for the new tax regime.

However, by the end of the year, before choosing a regime, one should calculate the tax liability from both regimes, and then opt for the one that entails lower tax liability.

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First Published: 12 Jan 2023, 11:58 AM IST