A Comprehensive Guide: Old vs New Tax Regime and its Impact


Finance Minister Smt. Nirmala Sitharaman had introduced the new tax regime (Section 115BAC) for individuals and Hindu Undivided Families (HUF) for the financial year (FY) 2020–21 in the Union Budget 2020

But the FM, in the Union Budget 2023 pushed for greater adoption of the new tax regime in a big-way.

Finance Minister Smt. Nirmala Sitharaman announced a slew of measures for taxpayers in Budget 2023. With a hike in the basic exemption limit and rebate and tweaks to the income tax slabs, Sitharaman has made the new income tax regime attractive for salaried individuals.

Following are the benefits available to those opting New Tax Regime:

Rebate increased to Rs 7 lakh under the new tax regime:

The limit of total income for rebate under section 87A of the Income-tax Act, 1961 has been increased from Rs 5 lakh to Rs 7 lakh for those opting for the new tax regime. Simply put, if your taxable income is below Rs 7 lakh, you do not have to pay any income tax in the new tax regime.

Hike in basic exemption limit in new the tax regime:

The basic exemption limit under the new tax regime has been revised from Rs 2.5 lakh to Rs 3 lakh. Individuals with an income of up to Rs 3 lakh do not have to pay any income tax under the new income tax regime.

Standard deduction introduced in the new tax regime:

Standard deduction has been extended to the new tax regime. Salaried individuals opting for the simplified tax regime can avail of a standard deduction of Rs 50,000.

Each salaried person with an income of ₹15.5 lakh or more will thus stand to benefit by ₹52,500. This figure of ₹52,500 is the tax benefit that one will get under Newly proposed New Tax regime as compared to Old New Tax Regime.

This will be clear by the following table:

Further, Standard Deduction on family pension under the new tax regime will be Rs 15,000 or 1/3rd of the pension amount, whichever is lower and regular Pensioners will get the benefit of standard deduction of Rs 50,000 under the new tax regime.

Surcharge reduced for the super-rich:

In the new tax regime, the highest rate of surcharge of 37 per cent on income above Rs 5 crore is reduced to 25 per cent. Thus, the highest tax rate in the country of 42.74% – which is among the highest in the world, reduced to 39%. 

The new tax regime will be treated as the default tax regime.

Starting from FY 2023-24, the new income tax regime will be set as the default option. If you want to continue using the old regime, you must submit a form at the time of return filing. You will have the option to switch between the two regimes annually. Kindly note that the Person can select any scheme but if he/she has income from business/profession he/she can change scheme only once.

The proposal to make NTR as the default tax regime supports the Government’s initiative to digitize and simplify the tax process for individuals

What is new in the New Tax Regime?

The proposed new tax regime allows a salaried individual to claim the benefit of standard deduction of Rs. 50,000.

Other deductions u/s 80C, 80D, interest paid on housing loan, deduction related to PT, HRA, LTA and other perquisites, donations u/s 80G, etc. are NOT ALLOWED in the new scheme.

New income tax slabs have become the default tax regime post Budget. Comparison of the slab rates under post-budget Old Tax and New Tax Regime:

How to decide which tax regime is better – Old or New?

Let us understand the same with some examples: When Total Deductions are ₹ 1.5 lakhs or less:  NEW REGIME WILL BE BENEFICIAL.

Illustration in table below:

When Total Deductions are more than ₹ 3.75 lakhs:  OLD REGIME WILL BE BENEFICIAL

Conclusion drawn:

– Without any deduction claims, the new tax regime is beneficial
– Taxpayers who want to avoid the hassles of claiming traditional deductions, who usually do not opt for HRA or claim other reimbursements via an employer or do not want to invest in traditional 80C, may now see the new regime as an option.
– When Total deductions are ₹1.5 lakhs or less: New regime will be beneficial
– When Total deductions are more than ₹3.75 lakhs: Old regime will be beneficial
– When Total deductions are between ₹1.5lakhs to ₹3.75 lakhs : will depend on your income level

Nevertheless, the messaging is clear, the government is aiming to move towards the new tax regime.

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