What is the difference between the Old Tax Regime and the New Tax Regime?

When the Union Budget 2023 was announced by the Finance Minister of India, it created a lot of confusion among the taxpayers about making a choice between the old and new tax regimes. The government of India introduced several new incentives in the 2023 and 2024 budgets to encourage the citizens of the country to adopt the new tax regime. 

Many financial experts suggest that the changes introduced were a strategic move by the government to eventually phase out the old tax regime. Although the new tax regime is now the default tax regime, the old tax regime will continue to exist. 

So, if you are wondering what the difference between the old and new tax regimes and not sure which is better, then this guide is just for you. Read on!

 

 

New Tax Regime

The Government of India implemented a new optional tax regime for all individuals and HUFs (Hindu Undivided Families) on April 1st 2020. Consequently, the government added Section 115 BAC to the Indian Income Tax Act of 1961. This section mandated lower taxes to all taxpayers who did not opt for the tax deduction or exemptions guaranteed under the old tax regime. 

Let us look at some of the important highlights of the new tax regime.

 

• Higher tax rebate limit

Under the new tax regime, taxpayers can get a rebate of up to Rs. 7 Lakhs. This means individuals earning up to Rs. 7 Lakh need not pay any tax under the new tax regime. Under the old regime, this limit was set at Rs. 5 Lakh. 

 

• Simplified tax slabs

The new tax regime raised the tax exemption limit to Rs. 3 Lakh, and the new tax slabs are as follows:

Tax Slab	Tax Rate
Up to Rs. 3 Lakh	Nil
Rs. 3 Lakh to Rs. 6 Lakh	5%
Rs. 6 Lakh – Rs. 9 Lakh	10%
Rs. 9 Lakh – Rs. 12 Lakh	15%
Rs. 12 Lakh – Rs. 15 Lakh	20%
More than Rs. 15 Lakh	30%

 

Standard deductions and pension deductions under the new tax regime

 

• Income from salary

The standard deduction of Rs. 75,000, which was previously accessible under the old tax regime, has been extended to the new tax regime.

 

• Family pension

The families that receive a pension are eligible to get a tax deduction of Rs. 15,000 or 1/3rd of the pension, whichever is lower. 

 

• Surcharge for HNI (High Net Worth Individuals) cut

The surcharge for income more than Rs. 5 crore is reduced from 37% to 25%. This change reduces their effective tax rate from 42.74% to 39%. 

 

• Higher leave encashment exemption

The exemption limit for non-government workers has been increased from Rs. 3 Lakh to Rs. 25 Lakh, which is about an 8-time increase. 

 

Old Tax Regime

The tax system that existed before the implementation of the new tax system is called the old tax regime. This regime offers about 70 exemptions and deductions, including HRA (housing rent allowance) and LTA (leave travel allowance), which allow you to reduce your taxable income. 

Under the old tax regime, Section 80C of the Indian Income Tax Act offered a deduction of up to Rs. 1.5 Lakh in taxable income. 

Let us look at some of the important deductions and exemptions under the old tax regime (please note this is not an exhaustive list)

• Deductions under Section 80TTA and 80TTB on interest earned from savings account deposits. 
• Professional tax and entertainment allowance deductions are available only for government employees.
• Although many salaried employees have shifted to the new tax regime for tax filing, some are still sticking to the old regime mainly because of the home loan deduction it offers. If you have opted for the old regime, you can continue to claim a deduction of up to Rs. 2 Lakh on the repayment of home loan interest on a self-occupied or rented property. This benefit is not available under the new tax regime. 

 

And, if you are looking to avail yourself of the best home loan offer, you can trust India Shelter, one of the leading NBFCs in India. They offer the loan at the most affordable interest rates and with flexible repayment terms, allowing you to have a hassle-free borrowing experience. 

 

Old tax regime vs new tax regime – Example

Let us assume that Mr. Hitesh Desai, a salaried employee, earns an annual income of Rs. 7,75,000. The table will give you a better understanding of his tax calculations under both tax regimes. 

 

Details	Old Tax Regime	New Tax Regime
Annual Gross Salary	7,75,000	7,75,000
Exemptions on repaying home loan interest and HRA	-	-
Standard deduction	-50,000	-75,000
Gross total income	7,25,000	7,00,000
Deductions available under Section 80C of the IT Act	-50,000	-
Deductions available under Section 80D of the IT Act	-	-
Deductions available under Section 80CCD (1B) of the IT Act	-	-
Total taxable income	6,75,000	7,00,000
Tax	47,500	20,000
Rebate	-	-20,000
Surcharge	-	-
Cess	1900	-
Total tax	49,400	-
Total deduction/exemption	1,00,000	75,000

 

 

Old tax regime vs new tax regime – which is better, and what should you choose?

Now that you understand the differences between the old and new tax regime, you may ask yourself the tough question – which is better? Well, the truth is there is no one correct answer to this. 

Switching to the new tax regime or sticking with the old one depends on what works best for you. Both the new and old tax regime have their own pros and cons. The old tax regime encourages you to save more and avail valuable deductions. 

On the other hand, the new tax regime is best suited for individuals who have a low income and also invest less, resulting in few deductions and exemptions. The new tax regime is more straightforward and has less potential for tax evasion fraud.