Old vs New Tax Regime: Decoding the Battle Between Old vs New Tax Regime for Salaried Employees! Trying to under stand which is better!!!

The recent Budget 2023 has stirred up a storm of confusion among taxpayers, as they grapple with the decision of choosing between the old and new tax regimes. The government’s introduction of incentives in the 2023 Budget has added another layer of complexity to the choice.

It’s evident that the government’s intention is to encourage taxpayers to transition to the new regime and eventually phase out the old one. With the new regime being the default option now, many taxpayers are left wondering which regime is the right choice for them in 2023.

Let’s take a closer look at both regimes and analyze which one may be the best fit for taxpayers in the current tax year.

The old tax regime, though existing alongside the new one, comes with established rules and exemptions that taxpayers may be familiar with. It allows for various deductions and exemptions, providing scope for optimizing tax savings. However, it can also be complex and time-consuming to navigate, with multiple rules and restrictions.

On the other hand, the new tax regime offers a simplified structure, with lower tax rates and no exemptions or deductions. It aims to streamline the tax process and make compliance easier. While it may lack the familiar exemptions and deductions of the old regime, it may appeal to taxpayers who prioritize simplicity and ease of compliance.

In light of the changes in Budget 2023 and the government’s push towards the new regime, taxpayers need to carefully evaluate their individual financial situations. Factors such as income levels, expenses, and financial goals must be considered. Taxpayers should also assess their risk tolerance, future financial needs, and long-term goals when making their decision.

It’s important to note that there is no one-size-fits-all answer. The best choice between the old and new tax regimes will depend on individual circumstances and priorities. Taxpayers may seek professional advice and thoroughly analyze their options to make an informed decision that aligns with their financial goals.

As taxpayers navigate the intricate tax landscape after Budget 2023, they face the challenge of choosing between the old and new regimes. It’s a decision that requires careful consideration, taking into account the unique financial situation of each taxpayer. With the government’s intent to promote the new regime, taxpayers need to stay informed and make a well-thought-out decision to optimize their tax planning in 2023 and beyond.

New Tax Regime:

Budget 2023: 5 Key Changes to Boost Adoption of New Tax Regime!

The new tax regime, introduced in Budget 2020, brought concessional tax rates but came with limitations on claiming exemptions and deductions like HRA, LTA, 80C, 80D, etc. As a result, it had limited takers. However, Budget 2023 introduced 5 significant changes to incentivize taxpayers to opt for the new regime:

1. Higher Tax Rebate Limit: The full tax rebate threshold has been raised to ₹7 lakhs from ₹5 lakhs in the old regime. This means taxpayers with an income of up to ₹7 lakhs will now pay zero tax!
2. Streamlined Tax Slabs: The tax exemption limit has been increased to ₹3 lakhs, and the new tax slabs have been simplified.
3. Removal of Standard Deduction: The standard deduction, which was available in the old regime, has been removed in the new regime to simplify the tax structure.
4. Removal of NPS Withdrawal Tax: The tax on National Pension System (NPS) withdrawals has been abolished in the new regime, making it more attractive for taxpayers to opt for NPS investments.
5. Option to Switch Back: Taxpayers can now switch between the old and new regimes every year, giving them flexibility to choose the regime that suits their financial situation best.

These changes in Budget 2023 aim to make the new regime more appealing by offering higher rebates, simplified slabs, and increased flexibility. However, taxpayers need to carefully evaluate their financial situation and future goals before making a decision. It’s crucial to consider factors like income levels, expenses, investment plans, and long-term objectives to make an informed choice between the old and new tax regimes in 2023 and beyond.

Here’s a table comparing the income slabs and tax rates for the old tax regime and the new tax regime in India, both until 31st March 2023 and from 1st April 2023 onwards:

Standard Deduction and Family Pension Deduction:

Salary income: The new tax regime now allows for a standard deduction of ₹50,000, which was previously only available under the old regime. This, combined with the rebate, results in a tax-free income of ₹7.5 lakhs under the new regime.

Family pension: Deduction of ₹15,000 or 1/3rd of pension, whichever is lower, can be claimed by recipients of family pension.

Reduced Surcharge for HNIs: Surcharge rate on income over ₹5 crores lowered from 37% to 25%, resulting in effective tax rate decrease from 42.74% to 39%.

Higher Leave Encashment Exemption: Exemption limit for non-government employees raised from ₹3 lakhs to ₹25 lakhs, an 8-fold increase.

Default Regime: FY 2023-24 onwards, new income tax regime will be set as default option. To continue using old regime, form must be submitted during return filing. Option to switch between regimes annually.

Old Tax Regime:

Old Vs New Tax Regime: Which is Better?

The old regime has over 70 exemptions and deductions, including HRA and LTA, that can lower tax payments. Section 80C allows for up to Rs.1.5 lakh reduction in taxable income. Taxpayers have a choice between old and new regime.

Deciding Between Old Vs New Tax Regime: Breakeven Point

We calculated breakeven point for different income levels (see table below) for individuals below 60 years of age. It helps determine which regime to choose. Breakeven threshold for deciding between New vs Old tax regimes. Breakeven is where tax liability is the same in both regimes.

If old regime deductions are higher than breakeven for your income, stay in old regime. If breakeven is higher, new regime is more beneficial.

If you have salary income:

If you have income other than salary:

Tax under Old vs New regime

Here are a few calculations to which will help you decide between old vs the new tax regime:

• When total deductions are ₹1.5 lakhs or less: New regime will be beneficial
• When total deductions are more than ₹3.75 lakhs: New regime will be beneficial
• When total deductions are between ₹1.5lakhs to ₹3.75 lakhs: will depend on your income level

When total deductions are ₹1.5 lakhs or less: New regime will be beneficial

When total deductions are more than ₹3.75 lakhs: New regime will be beneficial

When total deductions are between ₹1.5 lakhs to ₹3.75 lakhs: Will depend on various income levels

What deductions and exemptions are available under the new tax regime in comparison to the old tax regime?

Here is a comparison between the deductions and exemptions available under the old tax regime and the new tax regime:

Frequently Asked Questions on Old Tax Regime vs New Tax Regime

1. Which tax regime is better for an income of Rs 7 lakhs?

If you have an income of Rs 7 lakhs, the new tax regime will benefit you.

2. Which tax regime is better for an income of Rs 10 lakhs?

If you have an income of Rs 10 lakhs, the old tax regime will be beneficial only if you have made tax-saving investments (deductions other than standard deductions) of over Rs 2,62,500. If these deductions are less than Rs 2,62,500, then the new regime will be better for you.

3. Which tax regime is better for an income of Rs 12 lakhs?

The old tax regime is favorable for you if you have invested more than Rs 3,12,500 in tax-saving schemes. If you have invested or spent less than Rs 3,12,500, then the new regime will be better for you.

4. Which tax regime is better for an income of Rs 15 lakhs?

The better regime for you will depend on the amount of tax-saving investments you have made:

• Old regime: if tax-saving investments are greater than Rs 3,58,000
• New regime: if tax-saving investments are less than Rs 3,58,000

5. Which tax regime is better for an income of Rs 20 lakhs?

If you have an income of Rs 20 lakhs, the optimal regime for you will depend on the tax deductions you are eligible for:

• Old regime: if tax-saving investments are greater than Rs 3,75,000
• New regime: if tax-saving investments are less than Rs 3,75,000

6. Which tax regime is better for an income of Rs 25 lakhs?

If you have an income of Rs 25 lakhs, the better regime for you will again depend on the tax deductions you are eligible for:

• Old regime: if tax-saving investments are greater than Rs 3,75,000
• New regime: if tax-saving investments are less than Rs 3,75,000

7. Which tax regime is better for an income of Rs 30 lakhs?

If you have an income of Rs 30 lakhs, the new regime will benefit you if your tax deductions are less than Rs 3,75,000. Otherwise, opting for the new tax regime would be more advantageous.