Old Vs New Income Tax Regime – Which is beneficial to me?

After the announcement of the Union Budget 2023-24 by the Finance Minister Nirmala Sitaraman there is quiet a big debate amongst the citizens as to which scheme of taxation would be more beneficial to them in terms of reduced taxes and what are the pros and cons of the new tax regime. A quick glimpse onto the old and new tax regime, the difference between both, the decision-making aspect as to which one to choose will be elaborated in this article. But on a broader view the whole debate lies on what are the personal choices with respect to the savings and spending habits of each person and ultimately that is going to decide as to which regime would best suite an individual.

What is the old regime of taxation?

The old regime of taxation has been lately amended with effect from the financial year 2017-18 and the rates are as mentioned below,

For Normal citizens (Below Age 60)

Income Slab (Rs.)	Rate of Tax (%)
NIL to 2,50,000	0%
2,50,000 – 5,00,000	5%
5,00,000 – 10,00,000	20%
Above 10,00,000	30%

For Senior citizens (Age 60 – 80)

Income Slab (Rs.)	Rate of Tax (%)
NIL to 3,00,000	0%
3,00,000 – 5,00,000	5%
5,00,000 – 10,00,000	20%
Above 10,00,000	30%

For Super Senior citizens (Above Age 80)

Income Slab (Rs.)	Rate of Tax (%)
NIL to 5,00,000	0%
5,00,000 – 10,00,000	20%
Above 10,00,000	30%

The income under this regime will be computed after considering the various allowances, exemptions and deductions mentioned in sections of the Income Tax Act 1961, such as House rent allowance standard deduction on salary, interest paid on housing loan, deductions for investment in PPF, ELSS, Principal payment of Housing Loan, Contribution towards NPS, Payment of Mediclaim Policy, Interest paid on education loans, contributions towards donations etc.,

What is the new regime of taxation?

The new regime was introduced during the financial year 2020-21 by Finance Minister Nirmala Sitaraman and the aim of that budget was to reduce the likelihood of saving incentives and place more money in the hands of the taxpayer. In consonance with the aim, the new regime rolled out with no conditions attached with respect to investment in order to claim the deductions. This slab rate irrespective of the age of the citizen was introduced with the following rates,

Income Slab (Rs.)	Rate of Tax (%)
NIL to 2,50,000	0%
2,50,000 – 5,00,000	5%
5,00,000 – 7,50,000	10%
7,50,000 – 10,00,000	15%
10,00,000 – 12,50,000	20%
12,50,000 – 15,00,000	25%
Above 15,00,000	30%

Under this regime, the taxpayer is not eligible for any exemption such as standard deduction, professional tax, entertainment allowance, house rent allowance etc., and also not eligible to claim any deduction such as Chapter VI – A deductions which covers contributions towards PPF, Life Insurance, Mediclaim Insurance, NPS etc.,

Major Amendments in the New Regime introduced in Budget 2023

Now, the above rates have been changed in the Finance budget 2023-24 to the following rates,

Income Slab (Rs.)	Rate of Tax (%)
NIL to 3,00,000	0%
3,00,000 – 6,00,000	5%
6,00,000 – 9,00,000	10%
9,00,000 – 12,00,000	15%
12,00,000 – 15,00,000	20%
Above 15,00,000	30%

The rebate has been extended till a total income of Rs. 7 Lakhs in the new regime, i.e., a taxpayer need not pay any tax if his total income for a financial year 7 lakhs is or below., I.e., upto a monthly salary of Rs. 58,333/-

Also, in the budget 2023, it has been proposed to allow standard deduction of Rs. 50,000 for all the salaried persons in the new regime of tax akin the standard deduction allowed in the old tax regime.

Considering the above points, salaried taxpayers having gross salary upto Rs. 7.5 lakhs shall pay no tax in the new regime, i.e. upto a monthly salary of Rs. 62,500

Why New Tax regime?

The personal taxation was eyed by many citizens as it is affecting majority of the population and many expectations were hovering over the topic for increasing the limits of Section 80C which covers majority of the investment options for tax saving purposes, increasing the basic exemption limits, increasing the rebate etc., and when the Finance Minister announced the changes only in the new tax regime, the taxpayers who are already in the old tax regime, who have developed a practice of periodically investing their funds in the tax saving instruments and portfolios could be found un-happy with the changes brought in the budget as it has got nothing for them.

Since our economy is growing in a faster pace and it is competing in the global front with other fast developing countries like China, Nepal, Japan, Vietnam, Indonesia etc., it requires a free cash flow and spending culture. Economic growth is driven oftentimes by consumer spending and business investment. If consumers are buying homes, for example, home builders, contractors, and construction workers will experience economic growth. Businesses also drive the economy when they hire workers, raise wages, and invest in growing their business. A company that buys a new manufacturing plant or invests in new technologies creates jobs, spending, which leads to growth in the economy.

Consumer spending can increase in following ways –

1. tax reductions and tax rebates are designed to give the taxpayers more leverage with respect to spending money. Ideally, these taxpayers who own businesses spend a portion of that money for their businesses, which increases the businesses’ revenues, cash flows, and profits. Having a positive cashflow in turn gives them the ability to procure capital, improve technology, grow, and expand. All of these actions increase productivity, which grows the economy. For salaried person when tax rebates are offered the cashflow will help them in improving their lifestyles, for example a middle class person in a rented household will look for options to buy a new house which will have a positive impact on the economy or an upper middle class will opt to buy gold or a car to improve their lifestyles and all these will have a positive growth on the GDP and economy.

2. Making spending easy for taxpayers can help in economic growth. The life pattern of the millennials have taken a major shift from traditional life pattern and adding to this the pandemic waves have created an uncertainty in life thus the choices and preferences of spending vs savings have changed. Thus, the government is also making a channel for those people who have a different perspective towards life by introducing a tax regime whereby they can choose to either invest or spend the money after paying a fixed rate of tax.

New Vs Old regime

The comparison between the rates of the old and new regime is very important to understand which regime would be more beneficial to an individual. Accordingly, let’s assume you are investing Rs. 1,50,000 in 80C investment, Rs. 25,000 in Mediclaim and Rs. 50,000 in NPS. In this scenario the difference in tax between the new and the old regime would be as follows:

(Amount in Rs.)

Annual Income	Total Income (Old Regime)*	Total Income (New Regime)**	Tax Payable (Old Regime)	Tax Payable (New Regime)	Gain/ (Loss) in new regime
5,00,000	2,25,000	4,50,000	–	–	–
7,00,000	4,25,000	6,50,000	–	–	–
7,50,000	4,75,000	7,00,000	–	–	–
8,00,000	5,25,000	7,50,000	18,200	31,200	(13,000)
10,00,000	7,25,000	9,50,000	59,800	54,600	5,200
15,00,000	12,25,000	14,50,000	1,87,200	1,45,600	41,600
20,00,000	17,25,000	19,50,000	3,43,200	296,400	46,800
30,00,000	27,25,000	29,50,000	6,55,200	6,08,400	46,800
50,00,000	47,25,000	49,50,000	12,79,200	12,32,400	46,800

*Note – for old regime total income is calculated after considering 50,000 as standard deduction for salaried employees plus the total investment of 2,25,000/- as mentioned above.

**Note –The benefit of standard deduction has been proposed to be extended to the new regime as well, in the Budget 2023, and hence total income is calculated after considering the same.

Points to be inferred from the above calculations are as follows,

1. As your income increases to a higher slab, the benefit of new scheme will be widened.

2. If you have made donations or claiming other deductions such as interest on education loan, deduction in respect of medical treatment for self/ dependent, deduction for housing loan etc., then the test between old and new regime as to which is beneficial to you must be made on case-to-case basis.

3. The investment of Rs. 2,25,000 is an outflow for every year in the old regime.

4. The new regime gives zero tax benefit without any investment till an annual salary of Rs. 7.5 lakhs, i.e., Rs. 62,500/- per month.

Another important point in this aspect is to consider as to whether an outflow of Rs. 2,25,000 is feasible to be spent by an individual with an annual salary of 7,00,000? That would amount to almost 30% of his salary, and hence the Government’s measure to bring zero tax up to an annual salary of Rs. 7 lakhs in the new regime is very welcoming.

Accordingly let’s calculate the taxes based on the average of 15% savings on total salary of an individual,

(Amount in Rs.)

Annual Income	15% amount to be saved	Total Income (Old Regime) *	Total Income (New Regime) **	Tax Payable (Old Regime)	Tax Payable (New Regime)	Gain/ (Loss) in new regime
5,00,000	75,000	3,75,000	4,50,000	–	–	–
7,00,000	1,05,000	5,45,000	6,50,000	22,360	–	22,360
7,50,000	1,12,500	5,87,500	7,00,000	31,200	–	31,200
8,00,000	1,20,000	6,80,000	7,50,000	50,440	31,200	19,240
10,00,000	1,50,000	8,00,000	9,50,000	75,400	54,600	20,800
15,00,000	2,25,000	12,25,000	14,50,000	1,87,200	1,45,600	31,600
20,00,000	2,25,000	17,25,000	19,50,000	3,43,200	296,400	46,800
30,00,000	2,25,000	27,25,000	29,50,000	6,55,200	6,08,400	46,800
50,00,000	2,25,000	47,25,000	49,50,000	12,79,200	12,32,400	46,800

ROI Comparison between tax-saver and non-tax saver investments

The avenues for investment are also very divest today and many people are exploring various options now-a-days. Apart from the tax saving investments like PPF, NPS, ULIPs, Tax saver FDs, ELSS and various schemes introduced by Government investors are also looking at options to invest in Direct Equity investment, Mutual Funds, IPOs, Other than tax saver FDs, RDs, Physical Gold, Gold Bonds, Bonds, P2P lending, Real Estate etc., All these instruments fairly offer a medium to high return varying from 10 – 30% based on the risk appetite of the investor.

The ROI and Lock-in-period of various tax saving instruments are given below:

Name of the Instrument	Return on Investment	Risk Rate	Lock-in-Period
Public Provident Fund	7% – 8%	Low	15 years
National Pension Scheme	10% – 12%	Medium	Partial Maturity On completion of 60 Years
Tax Saver FDs	6% – 8%	Low	5 years
Equity Linked Savings Scheme	15% – 20%	High	3 Years

Comparing with the Non-tax saving investment options the tax saver investments give a lower return except for ELSS. Therefore, the opportunity cost of the interest lost should also be catered before deciding on choosing the old vs new regime.

For this, lets consider an average ROI of 8.5% for tax saver investments and an ROI of 12% for non-tax saver investments.

Annual Income	Savings	Total Income (Old)	Total Income (New)	Tax (Old)	Tax (New)	Difference in Tax (5)-(6)	ROI @ 8.5%	ROI @ 12%	Total savings by Opting new regime
(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)	(9)	(10)
500000	75000	375000	450000	–	–	–	6375	9000	2625
700000	150000	500000	650000	–	–	–	12750	18000	5250
800000	150000	600000	750000	33800	31200	8840	12750	18000	7850
1000000	225000	725000	950000	59800	54600	20800	19125	27000	13050
1500000	225000	1225000	1450000	187200	145600	41600	19125	27000	49475
2000000	225000	1725000	1950000	343200	296400	46800	19125	27000	54675
3000000	225000	2725000	2950000	655200	608400	46800	19125	27000	54675
5000000	225000	4725000	4950000	1279200	1232400	46800	19125	27000	54675

From the above case scenario, we can infer that benefit of higher ROI in non-tax saver instruments can be enjoyed in the new regime along with the reduced tax benefit.

For home buyers

Let’s now consider the case of home buyers in the following example;

Annual Income	Savings	Total Income (old)	Total Income (New)	Total Tax (old)	Total Tax (New)	Diff in tax
800,000	350,000	400,000	750,000	–	31,200	(31,200)
1,000,000	350,000	600,000	950,000	33,800	54,600	(20,800)
1,500,000	400,000	1,050,000	1,450,000	132,600	145,600	(13,000)
2,000,000	400,000	1,550,000	1,950,000	288,600	296,400	(7,800)
3,000,000	400,000	2,550,000	2,950,000	600,600	608,400	(7,800)
5,000,000	400,000	4,550,000	4,950,000	1,224,600	1,232,400	(7,800)

Note 1 – For the Annual Income of Rs.10 Lakhs and below, deduction U/s 24(b) for housing loan amounting to Rs. 2 Lakhs and 80C for principal repayment amounting to Rs. 1.5 lakhs is considered in the old regime.

Note 2 – For the Annual Income above Rs.10 Lakhs, apart from the above mentioned deduction in Note 1, deduction U/s 80 CCD (1B) is considered in the old regime.

From the above example our inference is that for homebuyers definitely the old tax regime is more beneficial.

A prudent decision would be to diversify your bucket of investment into various instruments with good mix of medium and high risk to have a fairly good return without any haste. The purpose of investment and the term of investment is also very important before making your investment decisions which will vary from one individual to another, say, if you are planning for an international trip then your goal is different from the one planning for retirement.

Conclusion

The main takeaways from these discussions are:

1. Taxpayers having salary in the range of 5 lakhs to 7 lakhs can opt for the new regime.

2. Taxpayers who have availed the facility of housing loan can opt old regime.

3. The benefit of the new regime widens as the income increases.

4. Do not consider the tax savings alone, also have a view about the interest lost by investing all the savings in a low ROI Investment.

5. Choose your investment pattern based on your financial goals and risk appetite.

6. Do not invest all your savings in one bucket, diversification gives you portfolio the stable return.

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Article by Shivasri Chartered Accountant CA Sreenivasa Rao & Co.