While there are merits and demerits of both the old and new regimes, it becomes cumbersome for taxpayers to pick the best-suited tax regime. Here is a simplified assessment of both the regimes to answer a few pertinent questions.
The Government of India introduced a new optional tax rate regime starting from April 1, 2020 (FY 2020-21), for individuals and the Hindu undivided family (HUF). Consequently, Section 115 BAC was to the Income Tax Act, 1961 (the Act) that prescribed reduced tax rates for individual taxpayers and HUFs on forgoing specified tax deductions or exemptions.
Based on the amendments proposed in Union Budget 2023, 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.
In a major boost to the new income tax regime and to make it more pleasing 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.
It is to be noted that the old tax regime has enough room for claiming deductions against various allowances forming part of salary (eg. HRA, LTA, etc) and also for specified investments/ expenses such as Public Provident Fund (PPF), National Pension Scheme (NPS), repayment of housing loan, payment of tuition fees, etc.
On the other hand, the new tax regime has the benefit of the standard deduction and there is full rebate provided to individuals earning up to INR 7 lakh annually. So, the individuals earning above INR 7 lakh annual income have to judiciously choose between the new and old tax regimes. As, the old tax regime provides deductions and no tax on income up to INR 5 lakh.
Here’s how the old tax regime differs from the new and what you must choose for as a taxpayer.
For an individual taxpayer, FY 2023-24 is another instance where they get to choose between the old tax regime and the new tax regime while filing their income tax returns. Here’s how the old tax regime differs from the new and what you must choose for as a taxpayer.
Features of the New Tax Regime
Lower tax rates
The new tax regime has widened the scope of taxation with seven tax slab rates ranging from 0% to 30% with the highest tax rate applicable on income above INR 15 lakh. Contrary to the new regime, there were fThe new tax regime is much wider in scope with five tax slab rates ranging from 0% to 30%, with the lowest starting with INR 3 lakh. Under the old system, income up to INR 2.5 lakh is exempt from personal income tax with the maximum rate applicable on income above INR 10 lakh which is 30%.
The new tax regime has rationalized the scope of taxation with five tax slab rates ranging from 0% to 30% with the income till INR 3 lakh exempt from tax and the highest tax rate of 30% applicable on income above INR 15 lakh. Under the old system, income up to INR 2.5 lakh is exempt from personal income tax with the maximum rate applicable on income above INR 10 lakh which is 30%.
Here’s how applicable tax rates under both the regimes work:
New Tax Regime 2023-24 (Default)
|
Net Annual Income Range |
New Regime Tax Rate |
|
INR 0-3 lakh |
Nil |
|
INR 3-6 lakh |
5% |
|
INR 6-9 lakh |
10% |
|
INR 9-12 lakh |
15% |
|
INR 12-15 lakh |
20% |
|
Above INR 15 lakh |
30% |
|
*Those earning up to
INR 7 lakh annually are entitled to a rebate. *Super Rich Tax Cut:
Highest surcharge rate on the income above INR 5 crore to be reduced from 37%
to 25% in the new tax regime. |
|
|
Net Annual Income
Range |
OLD REGIME TAX RATE |
|
Up to INR 2.5 lakh |
Nil |
|
INR 2.5 lakh to INR
5 lakh |
5% (tax rebate u/s
87A is available) |
|
INR 5 lakh to INR
7.5 lakh |
20% |
|
INR 7.5 lakh to INR
10 lakh |
20% |
|
INR 10 lakh to INR
12.5 lakh |
30% |
|
INR 12.5 lakh to INR
15 lakh |
30% |
|
Above INR 15 lakh |
30% |
The government has taken cognizance of the fact that the Act has various exemptions and deductions which make compliance by the taxpayer and administration of the tax laws by the tax authorities a burdensome process.
To give relief to taxpayers the simplified new tax rate regime requires specified tax deductions and exemptions to be forgone. Therefore, it is important to evaluate the impact of deductions/exemptions being claimed vis-Ã -vis the benefit of lower tax rates. Some of the popular tax exemptions/deductions which are not allowed under new tax regime include:
• Leave travel allowance (LTA)
• House rent allowance (HRA)
• Children education allowance
• Deduction for professional tax
• Interest on housing loan
• Deduction for specified investments or expenses under Chapter VI-A such as:
– deduction under Section 80C towards contribution to public provident fund, repayment of principal on housing loan, children’s school fees, life insurance premium, etc.
– other deductions towards medical insurance premium, interest on education loan, etc.
Opting for the applicable tax regime
An individual or HUF taxpayer may opt for the new tax regime based on their specific situation and sources of income. Switching between the old and new to the new tax regime can be done either on a year-on-year basis or only once. However, the frequency mostly depends on the source of income during the year.
• Where income includes business or professional income:
In the case where an individual or HUF has income from a business or profession, once the option to avail new tax rates for a financial year has been exercised, the new rates shall apply for subsequent years. However, the law provides such taxpayers’ one single option of switching back to the old tax regime should their circumstances change. This switch-back option is available only once in a lifetime unless the taxpayer ceases to have any income from a business or profession.
• Where income does not include business or professional income:
If an individual or HUF does not possess income from a business or profession, the selection can be made on a year-on-year basis. For individuals with salaries, the employer is required to withhold tax before the payment of the salaries. The employee is, however, required to inform the employer regarding their preferred tax rates.
An employee may choose between old and new tax regimes at the beginning of the year and intimate the employer, or at the time of joining new employment during the year. However, at the time of filling the personal tax return, the employee can change the tax regime.
For example, at the beginning of the year, an employee opts for the new tax regime and the employer deducts tax based on slab rates under the new tax regime. However, during the year they make certain tax-deductible investments like contribution to provident fund, payment of medical insurance premium, etc., and at the time of filing the income tax returns (ITR), they realise the old tax regime is more beneficial to them. In such a situation, they have the choice to opt for the old tax regime while filing the tax return though the employer had withheld taxes based on the new tax regime.
Which Tax Regime is Better?
Disclaimer: The story has been updated to add the latest details on the new tax regime announced in the Union Budget 2023-24. Also its is taken from different websites.
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