Old income tax regime vs new income tax regime: Which one should you choose?

  

Finance Minister Nirmala Sitharaman announced major changes to the new income tax regime in the Union Budget 2023, including lower tax rates and a tax rebate on income up to Rs 7 lakh. But how does it compare with the old income tax regime? Here is all you need to know.

In Short

• New income tax regime gets major overhaul
• Old tax regime sees no change
• New income tax structure now becomes default tax regime

By Koustav Das: Finance Minister Nirmala Sitharaman on Wednesday gave a makeover to the new income tax regime, with lower tax rates and introduction of standard deduction. However, the old income tax regime -- which allows for deductions such as home loan interest payments -- was left untouched.

While the changes to the new income tax regime, which has now been made the default personal tax structure, have received wide coverage, several are confused about whether the amendments to the new income tax regime make it more attractive in comparison to the old regime.

WHAT CHANGES IN THE NEW INCOME TAX REGIME?

Among the major announcements made by the finance minister, the most important one was the extension of rebate for annual income up to Rs 7 lakh, applicable to people under the new income tax regime.

“Currently, those with income up to Rs 5 lakh do not pay any income tax in both old and new tax regimes. I propose to increase the rebate limit to Rs 7 lakh in the new tax regime. Thus, persons in the new tax regime, with income up to Rs 7 lakh will not have to pay any tax,” the finance minister said.

n addition, a standard deduction of Rs 50,000 has also been introduced under the new income tax slab. This means, a salaried taxpayer would be eligible for an upfront deduction of Rs 50,000 from the total taxable income under the new income tax regime as well -- earlier, this deduction was only available under the old structure.

THE NEW INCOME TAX SLABS

The finance minister also rationalised tax slabs under the new income tax regime, reducing the number of taxable brackets to five. The new tax slabs are 1) 0-3 lakh - Nil, 2) Rs 3-6 lakh - 5 per cent, 3) Rs 6-9 lakh - 10 per cent, 4) Rs 9-12 lakh - 15 per cent, 5) Rs 12-15 lakh - 20 per cent and 6) 30 per cent for anything income above Rs 15 lakh.

The government said these measures will provide major relief to all taxpayers who opt for the new regime.

For instance, any individual with an annual income of Rs 9 lakh will be required to pay tax worth only Rs 45,000, which is just five per cent of his/her income. It marks a 25 per cent deduction over the Rs 60,000 that needs to be paid under the existing structure. Similarly, an individual with an income of Rs 15 lakh would be required to pay only Rs 1.5 lakh or 10 per cent of his or her income, a reduction of 20 per cent from the existing liability of Rs 1,87,500.

Abhishek Soni, Co-Founder of Tax2win, said, “The introduction of new slabs with lesser tax rates under the new tax regime as well as the announcement of introducing a single simplified common ITR form in the future, clearly shows the government's objective to simplify the income tax for the common people.”

“Further, no tax is levied up to Rs 7 lakh of income, a big relief for millions of salaried individuals,” he added.

NEW VS OLD INCOME TAX REGIME: WHAT'S BETTER FOR YOU?

Does the makeover make the new income tax regime make it more attractive in comparison to the old tax structure? Let’s find out.

The new income tax regime should become a clear choice for those earning Rs 7.5 lakh annually, given the introduction of a Rs 50,000 standard deduction, which will make them eligible for claiming a rebate on income up to Rs 7 lakh.

What if your income is higher?

Unlike the new income tax regime, slabs under the old tax structure have not been changed under the budget – income up to Rs 2.5 lakh exempt from tax, 5 per cent tax on income over Rs 2.5 lakh to Rs 5 lakh, 20 per cent tax on income above Rs 5 lakh to Rs 10 lakh and 30 per cent on income above Rs 10 lakh.

The old tax regime has been the mainstay for taxpayers in the country despite higher tax slabs, as it offers more scope for tax deductions to individuals with higher annual incomes and more investments.

You can claim several deductions under the old income tax regime under Section 80C, Section 80D and more. Not to mention, they are also eligible for an upfront standard deduction of Rs 50,000. With these, the taxable income of an individual with investments reduces drastically.

HEAD-TO-HEAD COMPARISON

For example, with an annual salary of Rs 9 lakh, you can claim several deductions – under Section 80C, Section 80D, interest on home loan and NPS of Rs 50,000 – to bring your taxable income to literally zero. Simply put, if you can claim deductions to bring taxable income to Rs 5,00,000, the tax amount becomes zero due to the rebate applicable under Section 87A.

In comparison, people opting for the new income tax regime will have to pay Rs 45,000 as tax on an annual income of Rs 9 lakh as they cannot claim deductions to reduce their taxable income.

In fact, individuals with annual income slightly above Rs 10 lakh will also have a lower tax outgo under the old tax regime as they can claim all the deductions to bring down their taxable income drastically. On the other hand, those with an annual income above Rs 10 lakh will have to pay tax at a flat rate under the new income tax regime after standard deduction, in the absence of deductions.

MADE UP YOUR MIND? WAIT..

The old tax regime still looks more lucrative for people with higher annual incomes, but only if they have the investments to claim enough deductions.

However, for individuals who do not want to invest in too many long-term tax-saving schemes or do not have a housing loan, the new income tax regime could be the answer.