TDS Deduction under Old vs New Tax Regime & Budget 2023 Impact

In which scheme shall I get my TDS deducted? Old Vs New Tax Regime and impact of Budget 2023!

This is most important question, on which all the taxpayers are in doubt, today I am writing an article on this topic to clarify this doubt, even it’s the question of all of my salaried clients. Most of the people who are in employment usually come across this question, in which scheme to get my TDS deducted? Old or new?

Now what’s the Funda of this old-new schemes?

As many of us are aware, about the taxation rules in India, as per the Income tax act, the taxes are imposed on individuals and Hindu Undivided Families (HUFs) based on their income levels. However, starting from the financial year 2020-21, Our Honourable finance minister Nirmala Sitaraman Ji had came up with a significant change in how taxes are levied.

A new tax regime was introduced by her, which decreased the tax rates considerably but also reduced the number of tax-saving opportunities and benefits which were available to taxpayers under the old scheme. To support this new system, the government introduced several incentives in the 2023 Budget.

If you’ve ever wondered whether the new regime or the old one is better for you, it’s important to understand the differences between them. This includes the variations which were introduced in the tax rates, in deductions which were available, and these changes will affect many individuals across different income brackets, let’s discuss how?

What is New Tax Regime?

It started from 1^st of April 2020 that is FY 2020-21, the Indian Government introduced a new optional tax rate system for individuals and Hindu Undivided Families (HUFs). This change amended the law by adding up various sections like Section 115BAC for individuals to the existing Income Tax Act of 1961, which meant lower tax rates for taxpayers and HUFs who opted not to claim certain tax deductions or exemptions.

As per the proposed updates which were introduced in the Union Budget 2023, the new tax regime was made the default option, which required taxpayers to actively choose the old tax regime if they prefer it.

That is the reason, in office your employer is questioning you about the same!

However, those people who are opting for the new system have to give up certain benefits which includes various exemptions and deductions such as House Rent Allowance (HRA), Leave Travel Allowance (LTA), Section 80C, Section 80D, and many more.

Consequently, the new tax regime was not opted by many individuals as it proved to be loss for many individuals in terms of paying excess tax liability.

To encourage the acceptance of the new system by people of India, the government announced five significant adjustments in the Budget 2023:

1. Increased Tax Rebate Limit: The total tax rebate has been raised to 7 lakhs from the previous 5 lakhs which means the individuals earning up to Rs 7 lakh are not required to pay any tax under the new regime.

Note: Limit of filing ITR is still 2.5 lac, so you are required to file your income tax return

2. Simplified Tax Slabs: The tax exemption limit has been raised to 3 lakhs from 2.5 lac previously, and the new tax slabs have been revised via this budget.

What are the slab rates in old and new scheme?

Old Tax Regime

– Slab 1: Income up to Rs 2.5 lakhs – No tax is applicable

– Slab 2: Income from Rs 2.5 lakhs to Rs 5 lakhs @ 5% tax

– Slab 3: Income from Rs 5 lakhs to Rs 10 lakhs @ 20% tax

– Slab 4: Income above Rs 10 lakhs @ 30% tax

New Tax Regime

– Slab 1: Income up to Rs 3 lakhs- No tax is applicable

– Slab 2: Income from Rs 3 lakhs to Rs 5 lakhs @ 5% tax

– Slab 3: Income from Rs 5 lakhs to Rs 7.5 lakhs @ 10% tax

– Slab 4: Income from Rs 7.5 lakhs to Rs 10 lakhs @ 15%

– Slab 5: Income from Rs 10 lakhs to Rs 12.5 lakhs @ 20% tax

– Slab 6: Income from Rs 12.5 lakhs to Rs 15 lakhs @ 25% tax

– Slab 7: Income above Rs 15 lakhs @ 30% tax

Now, from financial year 2024 via Budget 2023 the above seven slabs are revised to six slabs

So what are the new slabs?

–Slab 1: Income up to Rs 3 lakhs- No tax is applicable

– Slab 2: Income from Rs 3 lakhs to Rs 6 lakhs @ 5% tax

– Slab 3: Income from Rs 6 lakhs to Rs 9 lakhs @ 10% tax

– Slab 4: Income from Rs 9 lakhs to Rs 12 lakhs @ 15%

– Slab 5: Income from Rs 12 lakhs to Rs 15 lakhs @ 20% tax

– Slab 6: Income above Rs 15 lakhs @ 30% tax

This will give more benefit to many taxpayers under new scheme

Under the new tax regime which was introduced from April 1, 2020, some significant changes have been made that affect taxpayers.

Here are some of the main points which I am going to explain in simpler terms, which could be easily understood by you:

First is the Standard Deduction for Salary Income i.e. The standard deduction of ₹50,000, previously available only in the old tax regime, is now also available to the new regime which is combined with the rebate, this means that up to Rs 7.5 lakhs of income you are not required to pay any tax.

Secondly, Family Pension Deduction i.e. People receiving a family pension can claim a deduction of either ₹15,000 or one-third of the pension amount, whichever is lower.

Thirdly, Surcharge Cut for High-Net-Worth Individuals i.e. The surcharge rate for individuals earning over five crores annually has been reduced from 37% to 25%. This help HNI i.e. high net worth individuals by lowering their effective tax rate from 42.74% to 39%.

Last one is Higher Leave Encashment Exemption i.e. Non-government employees now have a much higher exemption limit for leave encashment, which means it is increased from 3 lakhs to 25 lakhs.

In the old tax regime, 50+ deductions and exemptions were available, including for House Rent Allowance (HRA) and Leave Travel Allowance (LTA), which could reduce taxable income and lower tax payments. Popular deductions included those under Section 80C, offering up to ₹1.5 lakhs in tax reduction, and various investment options like ELSS, NPS, PPF, and insurance premium tax exemptions.

In the new tax regime, there are only some notable exemptions which include income from life insurance, agricultural income, standard rent deduction, retrenchment compensation, leave encashment on retirement, proceeds from voluntary retirement schemes up to ₹5 lakhs, death cum retirement benefit, and scholarship money for education.

Choosing between the old and new tax regimes isn’t straightforward. It depends on factors like the tax-saving deductions and exemptions available in the previous tax system. Both regimes have their pros and cons, and the decision should be based on individual financial circumstances and goals.

What are advantages of both the schemes?

Speaking in short, The new regime is beneficial when your total deductions are less than 1.5 lakhs while Old Regime Advantage is that If your total deductions exceed 3.75 lakhs, sticking with the old regime is more beneficial while if deductions are ranging from 1.5 lakhs to 3.75 lakhs: The choice between the old and new regimes depends on your level of income.

A new income tax law for individuals who would rather take less deductions or are tired of the hustle and bustle of preparing taxes is available. This might include consultants who do not qualify for a number of exemptions and deductions. On top of this, older people without any pension income and that do not benefit from INR 50,000 standard deduction may find it more favourable to stick with the old regime. Senior citizens, however, have high interest incomes and they can take the benefit of INR 50,000 interest income deduction under section 80TTB making them better off under the previous scheme.

Advantages and disadvantages come with both regimes. The former regime urges tax payers to save while the later one suits lowly paid employees with little investments leading to fewer deductions as well as exemptions. On another note, the new taxation system is simpler and safer hence reducing paperwork and chances of tax evasion. However, since everyone has different financial situations it is vital to compare these two regimes in order to know which one suits you best.