Which regime should I select? Difference between the old and new regimes of taxation?

With the latest tax updates around us it is important for you to select Old Regime or New Regime for your tax planning ! In this article, we're going to break down the differences between the Old Tax Regime and the New Tax Regime in India, so you can make an informed decision that fits your financial situation.

So, Let's start with the basics - What are Tax Regimes?

Tax Regimes are a set of rules that help you calculate your tax liability. In India, you've got two options to choose from - the Old Tax Regime and the New Tax Regime. The Old Tax Regime has been around since way back in 1961 when the Income Tax Act was introduced. But in 2020, the government introduced the New Tax Regime as part of the Finance Act. There have been changes in both regimes, including some updates in the Budget 2023.

Tax Rates:

Old Tax Regime

INCOME SLABINCOME TAX RATE
up to ₹250,000Nil
₹250,001 to ₹5,00,0005%
₹5,00,001 to ₹10,00,00020%
More than ₹10,00,00030%

New Tax Regime

INCOME SLABINCOME TAX RATE
Up to ₹ 3,00,000Nil
₹3,00,001 to ₹6,00,0005%
₹6,00,001 to ₹9,00,00010%
₹9,00,001 to ₹12,00,00015%
₹12,00,001 to ₹15,00,00020%
More than ₹15,00,00030%

Compared to the Old Tax Regime, the New Tax Regime generally offers lower tax rates for certain income slabs, especially for individuals with lower income levels. This makes the New Tax Regime attractive for taxpayers who may not have significant exemptions, deductions, or allowances. However, it's important to note that the Old Tax Regime has some special tax exemptions for senior citizens aged above 60, which are not available under the New Tax Regime.

Income Tax Slabs for Senior Citizen aged above 60 years but below 80 years under old tax regime

Income Tax Slabs (In Rs)Income Tax Rate %
From 0 to 3,00,0000%
From 3,00,001 to 5,00,0005%
From 5,00,001 to 10,00,00020%
From 10,00,000 and above30%

Income Tax Slabs for Super Senior Citizens aged 80 years and above

Income Tax Slabs (In Rs)Income Tax Rate %
From 0 to 5,00,0000%
From 5,00,001 to 10,00,00020%
From 10,00,001 and above30%

Allowances and exemptions:

Allowances and exemptions are important components of your salary slip, and they can impact your tax liability. Under the Old Tax Regime, you can claim exemptions on various allowances, but this option is not available under the New Tax Regime.

However, the rate under NEW REGIME is LOWER versus the rate under OLD REGIME. Hence, in some cases, the NEW regime could also be BENEFICIAL.

Learn more about allowances here:

https://financial.wealthcafe.in/blog/2021/10/what-is-an-allowance-what-are-the-types-of-allowance/

Deductions:

Deductions are specific expenses or investments that you can claim as deductions from your taxable income. Under the Old Tax Regime, you can claim deductions under CHAPTER VI A for various expenses such as medical insurance premiums, tuition fees, donations to charitable organisations, etc. as well as investments in specified financial instruments such as Public Provident Fund (PPF), National Savings Certificates (NSC), and Equity-linked Savings Schemes (ELSS) and many more. However, under the New Tax Regime, most deductions are not allowed. Ouch!

But here's some good news - starting from FY 2023-24, you can now claim a Standard Deduction of INR 50,000 directly from your taxable income in the Old Regime and the New Regime. That means you can now enjoy some tax savings, even if you opt for the New Tax Regime. Now this may impact your decision-making process when choosing between the two regimes.

Rebates:

Rebates are another important consideration - they can be a game-changer when it comes to reducing your tax liability. Rebates are a form of relief from taxes that directly cancels out the taxable amount that you are liable to pay. 

Under the Old Tax Regime, if your taxable income is under INR 5 lakhs, you don't have to pay any taxes. That's right, it's tax-free! But hold on, there's even better news. 

With the recent changes after Budget 2023, under the New Tax Regime, if your taxable income is under INR 7 lakhs, it's tax-free. That means you get a bit more breathing room when it comes to tax-free income. It's definitely something to consider while making your decision on which tax regime to choose.

So, Which one is better?

Well, that depends on your individual circumstances. The Old Tax Regime allows for more exemptions, deductions, and rebates, which can significantly lower your tax liability. But the New Tax Regime offers lower tax rates. 

Here is what you need to do –

  • Salary Structure deduction and Chapter VI Deductions:

First, calculate all the exemptions that you are currently availing of. This may include House Rent Allowance (HRA), Leave Travel Allowance (LTA), food bills, phone bills, and other tax-free components. Additionally, Claim all your 80C, 80D and other deductions. 

Please Note: Salary allowance and Chapter VI Deductions are NOT available under NEW REGIME

  • Standard Deduction

Remember to deduct INR 50K of the standard Deduction under both: Old and New Regime. Now calculate both under their tax rates.

Wealth Cafe Advice

There is no one right answer that fits everyone here! YOU MUST COMPUTE it for yourself and then decide. You can refer to the calculator shared by the govt here - ______________ or even your company’s portals have the same which will be a good place to start looking for these. 

We do understand it's a tough call! So, take a good hard look at your financial situation, consider all the factors, and maybe even consult with a tax pro. You can reach out to us at iplan@wealthcafe.in for assistance.

If you want to dive deeper into the topic, check out our blog - click here, where we discuss an example on how to calculate your tax liability under both regimes. We hope this article has helped clarify things for you and made the decision-making process a little easier. Happy tax planning!

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