The Government of India had introduced a new optional tax rate regime starting from April 1, 2020 (FY 2020-21) for both individuals and HUFs. Consequently, Section 115 BAC was introduced to the Income Tax Act, 1961 that prescribed reduced tax rates for taxpayers.
Union Finance Minister Nirmala Sitharaman while presenting Union Budget 2023 announced that the new tax regime has been made as a default one, and the taxpayers will have to select the old tax regime if they wish to use it. The changes, which include lower tax rates and a tax rebate on income upto Rs. 7,00,000, will be applicable from April 1, 2023. The union budget announcements have set off speculations that the government could be planning to gradually shift from the old tax regime to the new tax regime.
Here’s how the new tax regime differs from the old tax regime.
OLD TAX REGIME
Under the old taxation regime, the taxpayer can claim deductions, exemptions, and other allowances to carefully organize their finances and reduce their tax burden and have proper tax planning.
Despite the higher tax rates, there are several exemptions and deductions to lower their taxable income and pay less taxes. Some exemptions are included in the income such as House Rent Allowance (HRA), Leave Travel Allowance, Food Coupons etc. Section 80C and National Pension System is the most popular and useful deduction which allows to reduce the taxable income by upto Rs. 1.5 lakh and Section 80TTA/80TTB which allows reduction income by upto 50,000.
Applicable Tax Rates
| Income Tax Slabs | Income Tax Rate (%) |
| 0-2,50,000 | 0 |
| 2,50,000-5,00,000 | 5% |
| 5,00,000-10,00,000 | 20% |
| 10,00,000 and above | 30% |
NEW TAX REGIME
To make it more beneficial to the middle-class common individual, the government has announced significant changes to the new income tax regime. The basic exemption limit in the new tax regime has been increased to INR 3 lakh, which was INR 2.5 lakh earlier. Also, a tax rebate on income earned up to INR 7 lakh, which was INR 5 lakh earlier under section 87A.
A standard deduction of INR 50,000 has also been added. This means that under the new income tax regime, a salaried taxpayer would also be eligible for an upfront deduction of INR 50,000 off their total taxable income; previously, this deduction was only allowed under the old regime.
Listed below are the Exemptions and Deductions that will be available/ not be available under the new tax regime
| Deductions and exemptions allowed under the New Tax Regime | Deductions and exemptions not allowed under the New Tax Regime |
| Standard Deduction available on Salary Income i.e 50,000 (From FY 2023-24, this is allowed as deduction) | Investments under 80C (apart from employer’s contribution to NPS): Rs.1,50,000 |
| Standard Deduction on Rent: 30% of Rent Received | House Rent Allowance |
| Employers Contribution to NPS u/s 80CCD(2) | Housing Loan Interest in respect of Self Occupied/Vacant Property |
| Interest on Home Loan on let-out property (Section 24) | Donations to specified entities: 50-100% of the amount donated |
| Agricultural Income | NPS Contribution: Rs. 50,000 |
| Retrenchment Compensation | Leave Travel Allowance |
| Conveyance Allowance for performing official duties | Entertainment Allowance: Rs.5,000 |
| Tour & Transfer Allowance | Interest on Education loan u/s 80E |
| Transport Allowance to handicapped employees for commuting home to office and back | Professional Tax |
| Daily Allowances incurred by employee on account of absence from his normal place of duty | Family Pension Deduction: Rs.15,000 |
| Leave encashment on retirement | Income of a Minor Child: Rs.1,500 |
| Commutation of Pension | Food & Beverage Exemption |
| Amount received by a member of HUF from the income of family estate. | Medical Insurance Premium u/s 80D: Rs. 25,000 (Rs. 50,000 for parents and senior citizens) |
| Gratuity | Saving bank Interest: Rs. 10,000 u/s 80TTA |
| VRS Proceeds: Rs. 5,00,000 | Interest Income (for senior citizens): Rs. 50,000 u/s 80TTB |
| Disability of self or independent: Rs.75,000 to Rs.1,25,000 depending on disability | |
| Treatment of self or dependant for specified disease: Rs. 40,000 and Rs. 1,00,000 for senior citizens |
Applicable Tax Rates
| Income Tax Rates | Previous Income Slab | New Income Slab (w.e.f FY 23-24) |
| NIL | 0-2,50,000 | 0-3,00,000 |
| 5% | 2,50,000-5,00,000 | 3,00,000-6,00,000 |
| 10% | 5,00,000-7,50,000 | 6,00,000-9,00,000 |
| 15% | 7,50,000-10,00,000 | 9,00,000-12,00,000 |
| 20% | 10,00,000-12,50,000 | 12,00,000-15,00,000 |
| 25% | 12,50,000-15,00,000 | – |
| 30% | 15,00,000 and above | 15,00,000 and above |
Conclusion
Due to the variety of deductions and exemptions available under the old tax regime, such as PPF, ELSS, and Mediclaim, the taxpayer had a lot of investment choices. The new tax regime is tailored to new investors and individuals who have only recently begun their careers, as their income has only recently begun. Taxpayers shall before submitting their returns, should evaluate and compare the tax liability under both the regimes and then decide on which to opt for.
A salaried individual can exercise this option every financial year. However, taxpayers having income from business or profession cannot switch between the new tax regime and regular tax regimes every year. If a taxpayer having income from business or profession once opts for the new tax regime, they can only switch back to the old tax regime once in a lifetime and will not be eligible for opting back to the new tax regime again.
As a result, the only way to determine old vs new tax regime- which is better is to enter income under both regimes to determine the actual tax payable.
Author Bio
