Difference Between Old and New Tax Regime: Which One and How to Choose?

In India, individuals are required to pay government taxes depending on their annual income level. Budget 2020 introduced a new tax regime, which changed the existing tax regimes. 

Where the old tax regime offered extended tax benefits for investments made throughout the year, the new tax regime simplified the tax rates but excluded tax exemptions and deductions.

However, taxpayers can select between the old and new tax regimes before the start of the new financial year. Understanding the difference between old and new tax regimes helps make an informed decision and save on taxes. This article will help you by showing the comparison between new and old tax regimes. 

Introduction to New Tax Regime

The new tax regime in India represents a significant shift in the income tax system, aiming to simplify tax compliance and reduce the burden of tax planning. The new tax regime was introduced under Budget 2020, revising the tax rates on salary brackets and eliminating more of the exemptions and deductions possible under the old tax regime.

The new tax regime has been in effect since 1 April 2020. Later, the Budget 2023 suggested some revisions to introduce a better tax structure. Currently, the new tax regime has been designated as the default tax regime; however, taxpayers can opt for the old tax regime if they want to use it. 

Key Advantages of New Tax Regime

1. Simplified Tax Slabs

Opting for new tax regime avails you reduced tax rates on different income tax slabs while you have to give up on various deductions and exemptions.

2. Tax Rebate Limit Increased 

The new tax regime has increased the tax rebates for income up to Rs. 7 Lakhs, which was Rs. 5 Lakhs in the old tax regime. This implies that individuals with an annual income of up to Rs. 7 Lakhs won’t pay taxes.

3.  Default Selection

The new tax regime is set to default for the new financial year starting in FY 2024. If you wish to continue with the old tax regime, you will have to select it specifically. 

4. Standard Deductions

• For Salaried Income: The standard deduction of Rs. 50,000 remains applicable as allowed under the old tax regime. Hence, while calculating the tax-free income, you can subtract Rs. 50,000 from the gross, resulting in a total of Rs. 7.5 Lakhs of tax-free income. 
• For Family Pension: Individuals receiving a family pension from the government or a private organization are eligible for a deduction of Rs. 15,000 or ⅓ of the pension, whichever is lower. 
• No LTCG Benefit: The new tax regime does not offer Long-Term Capital Gains (LTCG) benefits on debt funds invested after 31 March 2023.
• Higher Leave Encashment Exemption: The leave encashment exemption limit for non-government employees has been increased from Rs. 3 Lakhs to Rs. 25 Lakhs.
• Reduction in Surcharge for High Net Worth Individuals: The surcharge charges for those with an annual income of more than Rs. 5 Crores are cut down to 25%, while previously it was 37%. This change lowers the tax rates from 42.74% to 39% for the high net worth individuals.

Introduction to Old Tax Regime

The old tax regime in India refers to the traditional income tax system that was in place before the introduction of the new tax regime. Under the old regime, the taxpayers have the option to claim deductions under various sections of the Income Tax Act, such as Section 80C for investments in specified instruments like Provident Fund, PPF, ELSS, etc., Section 24 for home loan interest, and Section 80D for health insurance premiums. 

Also, the benefits payouts received are exempt from tax under Section 10 (10D) of the Income Tax Act, 1961. 

The old tax regime has five tax slabs with a limit of 0% to 30% rates. 

Key Advantages of Old Tax Regime

Here’s the list of key features of the old tax regime slabs:

1. Old Tax Regime Slabs

The table below shows the applicable tax slab rates as per the different earning brackets of an individual:

2. Exemptions and Deductions Under Old Tax Regime

• Taxpayers can claim deductions up to ₹1.5 lakh per annum for investments in specified instruments such as EPF, PPF, ELSS, NSC, SSY, life insurance premiums, repayment of the principal amount of a home loan, tuition fees for child education, and the 5-year FB scheme. 
• The premiums paid towards the health insurance policies for self, spouse, parents, and children can claim deductions under Section 80D of the Income Tax Act. A maximum of Rs. 25,000 deduction for self, children, and spouse, and Rs. 25,000 for parents is allowed. The premiums paid towards the health schemes for senior citizens are eligible for a deduction of upto Rs. 50,000. 
• Deduction of leave travel allowance.
• Deduction of the actual amount of house rent allowance.
• Standard deduction of Rs. 50,000 for salaried employees.
• The interest earned from the savings account deposits under Section 80 TTA/ 90 TTB.
• Donations made to specified funds and charitable institutions are eligible for deductions, subject to specified limits and conditions.

3. LTCG Benefits

The long-term capital gains (LTCG) benefits are available for debt investments. 

4. Tax Rebate

The taxpayer gets a tax rebate on income of up to Rs. 5 Lakhs under Section 87A. 

Comparison: New Tax Regime Vs Old Tax Regime

Since the new tax regime was introduced, there’s been a debate about which tax regime is better and what to choose. From a financial point of view, since every individual has a different set of financial goals and investment objectives, one tax regime may not be universally beneficial for all. It depends on income, available exemptions, and deductions. 

Let’s have a look at how the taxes are calculated under the old and new tax regimes: 

Say, a salaried individual under 60 years old with an annual income of Rs. 18 Lakhs. When no tax-saving investments were made within the financial year, the tax is calculated for FY 2024-25 as under: 

Now, suppose the individual makes a total investment of 2 Lakhs, i.e., 1.5 Lakhs for investments under Section 80C of the Income Tax Act, and an additional Rs. 50,000 for the premium paid towards a health policy for parents above 60 under Section 80D. The calculated tax liability is available as follows: 

* The above calculated taxes result from using the online income tax calculator. You can calculate the taxes according to your tax liability. 

Which Tax Regime is Better to Choose: Old or New Tax Regime?

The best way to answer the above question is to identify your income level, consider the investments that you can make within a financial year, and determine which slab you lie in. 

You can compare the old and new tax regimes based on your tax-saving liabilities and have your answer. The right approach is to choose the regime having the lower tax liability. 

While the old tax regime involved more paperwork, the prescribed investment had to be declared within a specific period. 

Critically consider the pros and cons of both new and old tax regimes and the overall tax benefits you can achieve. Use the income tax calculator to help you estimate the amount to make things easier. 

Frequently Asked Questions

Can I claim 80C deductions under the new income tax system?

1. No, if an individual opts for a new tax regime, they cannot take advantage of the tax deductions and exclusions under Section 80C and Section 80D. 

Does a salaried individual need to choose the tax system for every fiscal year?

1. For the financial year 2024-25, the new tax regime is considered the default option unless the taxpayer specifically opts for the old tax regime. As of now, switching from one tax regime to another within one financial year is not restricted.

Can I switch from old tax systems to new tax systems multiple times?

1. A salaried individual can opt for the applicable tax regime at the start of each financial year and even at the time of filing the income tax return. An individual with a business income has only one chance to opt for the tax regime; once you have chosen the new tax regime, you cannot switch back. 

Do I need to file for taxes, even if my annual income is below Rs. 3 Lakhs?

1. Even if your income is below Rs. 3 Lakhs, you must file for an income tax return. 

How do you calculate the surcharge on the income tax?

1. The surcharge is calculated on the tax charged and not on the income earned. Say you give 20% of tax on Rs. 10,000, which is Rs. 2,000. Then, a surcharge will be charged on Rs. 2,000 (if applicable). Below is the rate for the surcharge: 

• For income above 50 Lakhs, 10% surcharge is levied
• For income more than 1 Crore, 15% surcharge is applicable
• For income more than 2 Crores, 25% surcharge is charged

If my income is 7 Lakhs, how much tax do I have to pay?

1. As per the new tax regime, no tax is charged on income of up to Rs. 7 Lakhs. 

Is the standard deduction applicable in the new tax regime?

1. Yes, the standard deductions are applicable under the new tax regime. A total of Rs. 50,000 is allowed for standard deduction from the total salaried income. 

What deductions are allowed under the new tax regime?

1. The following deductions can be claimed under the new tax regime:

• Standard deduction of Rs. 50,000
• Home loan interest under Section 24B
• Employer contribution made to NPS under Section 80CCD
• Contributions made to Agniveer Corpus Fund under Section 80CCH
• Deduction on family pension income

Can I avail of HRA benefits under the new tax regime?

1. The exemption for the house rent allowance (HRA) is not available under the new tax regime. 

How do I switch from the old tax regime to the new tax regime?

1. Taxpayers can choose between the old and new tax regimes at the start of each financial year or while filing their income tax returns. Based on their income slabs and investment preferences, opt for the preferred regime while filing taxes.

Will the new tax regime save me more money compared to the old regime?

1. Gaining benefits from the tax regime depends on various factors, including your income, deductions, exemptions, and individual tax planning. Some taxpayers may find the new tax regime more beneficial, while others may prefer the old regime.