The Indian income tax system has undergone significant changes in recent years, particularly with the introduction of the new tax regime in 2020-21. This has sparked a debate among taxpayers about which regime is more advantageous. In this article, we will delve into the differences between the old and new tax regimes, exploring the tax rates, deductions, and practical examples to help you make an informed decision.

Understanding the New Tax Regime:

The new tax regime, implemented from April 1, 2020, introduced lower tax rates for individual taxpayers and Hindu undivided families (HUF). However, to avail of these lower rates, taxpayers are required to forgo certain exemptions and deductions such as HRA, LTA, 80C, and 80D. While this new system has found some supporters, the government made five significant adjustments in Budget 2023 to encourage taxpayers to adopt the new regime.

Increased Tax Rebate Limit:

Under the new tax regime, the government introduced a total tax rebate of up to 7 lakhs, compared to the previous threshold of 5 lakhs. This means that individuals earning up to Rs. 7 lakh will not have to pay any tax under the new regime.

Simplified Tax Slabs:

The new tax regime also brought about simplified tax slabs. The tax exemption limit has been raised to 3 lakhs, and the new tax slabs are as follows:

- Up to Rs. 3 lakhs: Nil tax

- Rs. 3 – 6 lakhs: 5% tax

- Rs. 6 – 9 lakhs: 10% tax

- Rs. 9 – 12 lakhs: 15% tax

- Rs. 12 – 15 lakhs: 20% tax

- Rs. 15 lakhs and above: 30% tax

Standard Deduction and Family Pension Deduction:

In the new tax regime, individuals can avail of a standard deduction of Rs. 50,000, which was previously available only under the old regime. This, combined with other rebates, allows for up to 7.5 lakhs in tax-free income under the new regime. Additionally, those receiving a family pension can claim a deduction of ₹15,000 or 1/3rd of the pension, whichever is lower.

Surcharge for High-Net-Worth Individuals Cut:

To attract high-net-worth individuals to the new tax regime, the government reduced the surcharge rate for income over five crores from 37% to 25%. This change effectively lowers their tax rate from 42.74% to 39%.

Higher Leave Encashment Exemption:

Non-government workers now enjoy a higher leave encashment exemption limit, which has been increased eightfold from 3 lakhs to 25 lakhs.

Understanding the Old Tax Regime:

The old tax regime, which existed before the introduction of the new regime, offers approximately 70 exclusions and deductions, including HRA and LTA, to reduce taxable income and minimize tax payments. One of the most significant deductions available under the old regime is Section 80C, which allows for a reduction in taxable income of up to Rs. 1.5 lakh.

Estimating Tax Liability:

To help individuals decide between the old and new tax regimes, it is essential to estimate the tax liability under each. For example, if an individual has an income of Rs. 8,00,000, the tax calculation under both regimes would be as follows:

- Under the old regime: Tax of Rs. 62,500 (including cess)

- Under the new regime: Tax of Rs. 30,000 (including cess)

Comparing the Tax Regimes:

Deciding whether the old or new tax regime is better depends on various factors such as individual deductions, exemptions, and income levels. Generally, the new tax regime may benefit individuals who do not require excessive deductions or wish to avoid complex tax preparation. Non-salaried taxpayers and older individuals without a pension may find the new regime more suitable. On the other hand, the old regime instills the habit of saving and may be advantageous for individuals with higher deductions and exemptions.

Choosing between the old and new tax regimes requires careful consideration of individual circumstances. While the new tax regime offers lower tax rates, it comes with fewer deductions and exemptions. The old regime provides more opportunities to reduce taxable income but involves a complex tax structure. To make the best decision, individuals should compare the two regimes based on their unique financial situations and consult with a tax professional if necessary.