Law Legends


Old vs New tax regime: which is better?

Topic Covers:

  1. New tax regime
    a. Features
    b. Deductions/exemptions to be forgone
    c. Deduction allowed
  2. Old Vs. New tax slab
  3. Opting for the applicable tax regime
  4. Which Tax Regime is better?
  5. How To Opt For Old Tax Regime

Individuals and HUF need to pay income tax as per the slab rates applicable to the relevant assessment year. The Government of India has introduced a new tax rate regime for individuals and Hindu Undivided Families (HUF) from 1st April 2020 (FY 2020-21). The new tax rate regime has been introduced by inserting section 115BAC in the Finance Act 2020. To provide concessional tax rates as per the new tax regime an individual taxpayer and HUF need to forgo specified tax deductions or exemptions.

Further in the union budget 2023, the amendment is proposed to make the new tax regime as the default tax regime, and the option to opt for the old tax regime is provided to the taxpayer.

1. New tax regime:

Section 115BAC was inserted to provide the benefit of a concessional tax rate to individuals and HUFs. However who wish to pay tax as per this tax slab cannot claim several exemptions and deductions such as house rent allowance, and deductions under Chapter VI-A i.e. section 80C, 80D, 80G etc.

To encourage the adoption of the new tax regime significant changes have been announced to the new tax regime. The basic exemption limit in the new tax regime has been increased from ₹ 2.5 lakhs to INR 3 lakh. A tax rebate under section 87A will be provided for income up to ₹ 7 lakh.

    • Lower tax rate: The new tax regime has a wider scope of taxation with seven tax rate slabs ranging from 0% to the highest 30% applicable on income above ₹ 15 lakhs. Under the new tax regime basic exemption limit of income is ₹ 3 lakhs. No tax on income up to ₹ 3 lakhs.
    • Rebate: For individuals total income for tax rebate under section 87A also increased to ₹7 lakhs which is ₹ 5 lakhs for the old tax regime. This means an individual earning income upto ₹ 7lakh can claim tax rebate as per section 87A up to tax amount ₹ 25,000.

b.Deductions/exemptions to be forgone
Here is the list of deductions/exemptions not allowed under the new tax regime:

  • House rent allowance (HRA)
  • Deduction for professional tax
  • Leave travel allowance (LTA)
  • Children education allowance
  • Other special allowances [Section 10(14)]
  • Interest on housing loan
  • Deduction for specified investments or expenses under Chapter VI-A except Section 80CCD(2) and Section 80JJAA.

c.Deduction allowed in new tax regime
List of popular exemptions/deductions allowed under the new tax regime

  • Standard deduction of ₹ 50,000 section 16(ia)
  • Transport Allowances w.r.t. Person with Disabilities (PwD)
  • Conveyance Allowance
  • Perquisites for Official Purposes
  • Exemptions for Voluntary Retirement Scheme u/ Section 10(10C)
  • Gratuity Amount u/ Section 10(10)
  • Leave Encashment u/ Section 10(10AA)
  • Interest on Home Loan on Lent-out Property u/ Section 24
  • Employer’s Contributions to Employees NPS Accounts u/ Section 80CCD(2)
  • Additional Employee Costs u/ Section 80JJA
  • Standard Deductions on Family Pension u/ Section 57(IIA)
  • Deductions on Deposits in Agniveer Corpus Fund u/ Section 80CCH(2)

2. Old Vs New tax slab:

A taxpayer can pay the tax according to the new tax regime when he is ready to forgo the benefit of specified tax deductions and exemptions. Hence it is important to evaluate the impact of the benefit of the lower tax rates vis-à-vis deductions/exemptions being claimed.

The old and new tax regime comparison is given in the table below:

Income Tax Slab New Tax Regime  (Applicable from 1st April 2023) New tax Regime (until 31st March 2023) Old Tax Regime
₹0 - ₹2,50,000 - - -
₹2,50,001 - ₹3,00,000 - 5% 5%
₹3,00,001 - ₹5,00,000 5% 5% 5%
₹5,00,001 - ₹6,00,000 5% 10% 20%
₹6,00,001 - ₹7,50,000 10% 10% 20%
₹7,50,001 - ₹9,00,000 10% 15% 20%
₹9,00,001 - ₹10,00,000 15% 15% 20%
₹10,00,001 - ₹12,00,000 15% 20% 30%
₹12,00,001 - ₹12,50,000 20% 20% 30%
₹12,50,001 - ₹15,00,000 20% 25% 30%
More than ₹15,00,000 30% 30% 30%

3. Opting for the applicable tax regime

Union Budget 2023, makes the new tax regime the default tax regime.
An individual or HUF taxpayer may opt for the old 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 based on the source of income.

4. Which Tax Regime is better?

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. This means he has the option to choose between the old and the new tax regime every year at the time of filing of return.

The sources of income, quantum of deductions, and exemptions are different for every individual so one rule cannot be applied to all. To choose the lower tax liability calculate the tax as per the new tax regime as well as the old tax regime after considering the exemptions and deductions available under the old tax regime. Compare the tax liability under both regimes and then decide on which to opt for.

Income includes business or professional income:

If an individual or HUF has income from a business or profession, once the option to avail old tax rates for a financial year has been exercised, the old rates shall apply for subsequent years. However, the law provides such taxpayer one single option of switching back to the new tax regime should their circumstances change.

5. How To Opt For Old Tax Regime

A taxpayer with income from business or profession had the option to opt for the new tax regime only once. This means once the option is exercised the availed tax rate will be applicable to all the subsequent assessment years. To opt for this option taxpayer is required to file Form 10IE. This form was introduced in October 2020.

After the amendments proposed by the Union Budget 2023 in the new tax regime, from FY 2023-24 onwards taxpayers will be required to opt for the old tax regime, and the new tax regime will be the default option.

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