Old vs New Tax Regime: Which Is Better for Salaried Employees?
The Budget 2023 caused confusion among taxpayers about choosing between the old and new tax regimes. The government introduced incentives in the 2023 and 2024 Budgets to encourage the adoption of the new regime. These changes show that the government intends to transition taxpayers to the new regime and eventually phase out the old one. Though the new regime is now the default tax regime, the old tax regime will continue to exist.
Budget 2025 Update:
– No income tax for income up to Rs. 12 Lakhs for the new tax regime.
– Modified slab rates for FY 2025-2026 (AY 2026-2027) are as follows:
– Income from Rs. 4,00,001 to Rs. 8,00,000: 5%
– Income from Rs. 8,00,001 to Rs. 12,00,000: 10%
– Income from Rs. 12,00,001 to Rs. 16,00,000: 15%
– Income from Rs. 16,00,001 to Rs. 20,00,000: 20%
– Income from Rs. 20,00,001 to Rs. 24,00,000: 25%
– Income above Rs. 24,00,000: 30%
New Tax Regime:
A new tax regime was introduced in Budget 2020 with altered tax slabs and concessional tax rates. However, those who opt for the new regime cannot claim several exemptions and deductions, such as HRA, LTA, 80C, 80D, and more. Because of this, the new tax regime did not have many takers. The government in the Budget 2023 introduced 5 key changes, which remain the same even for FY 2024-2025 since no changes were made in the Interim Budget 2024, to encourage taxpayers to adopt the new regime. They are:
– Higher Tax Rebate Limit: Full tax rebate on an income up to ₹7 lakhs has been introduced. Whereas this threshold is ₹5 lakhs under the old tax regime. This means that taxpayers with an income of up to ₹7 lakhs will not have to pay any tax at all under the new tax regime!
– Streamlined Tax Slabs: The tax exemption limit has been increased to ₹3 lakhs, and the new tax slabs are:
– Income up to ₹3 lakh: Nil
– Income from ₹3 lakh – ₹7 lakh: 5%
– Income from ₹7 lakh – ₹10 lakh: 10%
– Income from ₹10 lakh – ₹12 lakh: 15%
– Income from ₹12 lakh – ₹15 lakh: 20%
– Income above ₹15 lakh: 30%
Old Tax Regime:
The old regime is the tax system that prevailed before the introduction of the new regime. Under this regime, there are over 70 exemptions and deductions available, including HRA and LTA, that can reduce your taxable income and lower tax payments. The most popular and generous deduction is Section 80C, which allows for a reduction of taxable income up to Rs.1.5 lakh. The taxpayers are given a choice between the old and the new tax regime.
Difference Between Old Vs New Tax Regime: Which is Better for FY 2023-24?
The decision to switch to the new or remain in the old tax regime or which regime is better for you shall be based on the tax savings deductions and exemptions you are eligible for in the old tax regime. To make it easier, we have calculated a breakeven point for various income levels (refer to the table below) for a salaried individual below 60 years of age. This can be used to determine which regime to choose.
The Breakeven Threshold for Deciding Between New vs Old Tax Regimes for FY 2023-24
The Breakeven point is the amount at which there will be no difference in tax liability between the two tax regimes. If your total eligible deductions and exemptions in the old tax regime are higher than the breakeven threshold for your income level, it is advisable to stay in the old regime. On the other hand, if the breakeven threshold is higher, then moving to the new tax regime is more beneficial.
Conclusion:
Many individuals often find themselves questioning the disparities between the old and new tax regimes. The new income tax regime is designed to accommodate those who have more personal commitments such as repayment of personal/vehicle loans, medical treatment of parents or dependents, or wish to avoid the burden of extensive tax preparation or have minimal tax deductions due to their ineligibility for section 10 exemptions, standard deductions, tax on employment, employer contribution to pension scheme etc. Conversely, the old tax regime can yield more tax savings for senior citizens, who derive a substantial portion of their income from interest, can benefit from Section 80TTB, which allows them to claim Rs.50,000 as interest income deduction and feel more secure under the old tax regime.
Both the old and new tax regimes possess advantages and disadvantages. The previous tax structure encourages taxpayers to cultivate a habit of saving, while the new tax structure favours employees with lower earnings and investments, resulting in fewer deductions and exemptions. The new tax system is considered safer and simpler, involving fewer records and reducing the potential for tax evasion fraud. However, due to the unique nature of individual deductions and exemptions, a thorough comparison of the two regimes is necessary to determine the best fit for each person.
I hope this helps! If you have any more questions or need further assistance, feel free to ask.