The recent changes in India’s income tax structure have created confusion among salaried taxpayers about whether to continue with the old tax regime or switch to the new one. This comprehensive guide will help you understand the key differences between Old vs New Tax Regime for Salaried Employees and decide which one results in lower tax liability for your income level and investments.
Table of Contents
- Introduction
- How the New Tax Regime Evolved
- New Tax Regime vs Old Tax Regime: A Comparison
- Income Tax Slabs under Both Regimes
- Deductions and Exemptions Allowed
- How to Calculate Tax Liability Under Both Regimes
- When Does the New Regime Make Sense?
- Things to Consider Before Choosing a Regime
- Conclusion
- FAQs on Choosing Between the Regimes
Introduction to Old vs New Tax Regime for Salaried Employees
The new tax regime introduced in 2020 offered lower tax rates but removed most exemptions and deductions that helped reduce tax liability under the old regime. The new regime saw lacklustre adoption among taxpayers initially.
In Budget 2023, the government announced several changes to the new tax regime to make it more attractive. These include a higher rebate limit of ₹7 lakhs, the reintroduction of the standard deduction, reduced tax slabs, and more.
The key question now is – which tax regime results in lower tax outgo for you based on your income level and current deductions? Let’s analyze this in detail.
How the New Tax Regime Evolved Over Time
When first introduced in 2020, the new income tax regime came with the following changes:
- Reduced tax rates: The tax slabs were modified to offer lower tax rates but removed most exemptions.
- No deductions or exemptions: Taxpayers could no longer claim deductions like Section 80C, 80D, HRA exemption, etc. which help reduce taxable income under the old regime.
- Optional: Taxpayers had the flexibility to either remain in the old regime or switch to the new one, whichever was more beneficial.
However, the adoption of the new regime remained lukewarm as the math did not work for most.
In Budget 2023, the government announced several tweaks to the new tax regime structure, making it more attractive:
Key Changes Introduced in Budget 2023
- Higher rebate limit: Full tax rebate on income up to ₹7 lakhs vs ₹5 lakhs earlier.
- Reintroduction of standard deduction: ₹50,000 standard deduction added back, taking effective tax-free income to ₹7.5 lakhs.
- Streamlined tax slabs: Exemption limit increased from ₹2.5 lakhs to ₹3 lakhs. Tax slabs modified to provide more relief.
- Default regime: The new regime is now the default; one must opt for the old regime.
Clearly, the government intends to incentivize more taxpayers to switch to the new regime. But does it make sense for you? Let’s analyze.
New Tax Regime vs Old Tax Regime: A Detailed Comparison
While the new income tax regime comes with lower tax rates, it takes away most deductions and exemptions available under the old tax structure. Here is a close look at the key features of both regimes:
1. Income Tax Slabs
The tax slabs under both regimes are as follows:
Old Tax Regime (FY 2022-23)
| Total Income | Tax Rate |
|---|---|
| 0 – ₹2,50,000 | Nil |
| ₹2,50,000 – ₹5,00,000 | 5% |
| ₹5,00,000 – ₹10,00,000 | 20% |
| Above ₹10,00,000 | 30% |
New Tax Regime (FY 2023-24)
| Total Income | Tax Rate |
|---|---|
| 0 – ₹3,00,000 | Nil |
| ₹3,00,000 to ₹6,00,000 | 5% |
| ₹6,00,000 to ₹9,00,000 | 10% |
| ₹9,00,000 to ₹12,00,000 | 15% |
| ₹12,00,000 to ₹15,00,000 | 20% |
| Above ₹15,00,000 | 30% |
The tax slabs under the new regime are clearly more favorable for those in the lower income brackets.
For instance, income between ₹2.5 – 5 lakhs attracted 5% tax under the old regime but is fully tax exempt under the new one until ₹3 lakhs.
Those earning ₹6 – ₹9 lakhs also benefit from the reduced 10% rate under the new regime vs 20% under the old.
2. Deductions and Exemptions:
The major trade-off with the lower rates under the new regime is that most common deductions and exemptions available under the old regime are no longer allowed.
Here is a look at the deductions allowed under both regimes:
Deductions allowed under the Old Regime
- House Rent Allowance exemption
- Employee’s Provident Fund
- Life Insurance Premium
- NPS contributions
- ELSS Investments
- Section 80C deductions
- Section 80D – Health Insurance Premium
- Home Loan Interest u/s 24
- Education Loan Interest u/s 80E
- Standard Deduction
- Interest Income u/s 80TTA
- Deduction for Differently Abled u/s 80U
- And many more
Deductions allowed under the New Regime
- Employer’s NPS Contribution
- Standard Deduction
- Deduction for Differently Abled u/s 80U
- Leave Encashment exemption increased to ₹25 lakhs
- Some exemptions like conveyance allowance, LTA
- Deduction of ₹15,000 against Family Pension
As visible, most common deductions available under the old regime stand removed under the new tax structure.
This means one’s taxable income could be significantly higher under the new regime if they claim deductions like 80C, HRA, home loan interest etc. under the old regime.
Let’s understand this with an example:
Prakash has a gross total income of ₹8.5 lakhs during FY 2022-23. His deductions under the old regime are:
- HRA Exemption: ₹1 lakh
- Section 80C: ₹1.5 lakhs
- Home Loan Interest: ₹50,000
His taxable salary after claiming deductions is ₹8.5 lakhs – ₹1 lakh – ₹1.5 lakhs – ₹50,000 = ₹5 lakhs
Under the old regime, he pays 5% tax on only ₹2.5 lakhs, after accounting for the basic exemption of ₹2.5 lakhs.
However, under the new regime, he cannot claim HRA, Sec 80C or home loan interest deduction. His taxable income remains ₹8.5 lakhs. He pays:
- Nil tax on income upto ₹3 lakhs
- 5% tax on ₹3 – ₹6 lakhs = ₹15,000
- 10% tax on ₹6 – ₹8.5 lakhs = ₹25,000
Total Tax under New Regime = ₹40,000
Despite earning the same ₹8.5 lakhs, Prakash’s tax outgo is significantly higher under the new regime since he cannot lower his taxable income using deductions.
Therefore, the new regime may not always lead to tax savings, especially for those claiming substantial deductions under the old regime. Proper calculations are vital.
How to Calculate Tax Liability: Under Old vs New Tax Regime for Salaried Employees
The decision on whether to stick to the old regime or adopt the new one depends on which results in lower tax liability for your specific income level and available deductions.
Here is a step-by-step process to calculate tax liability under both regimes:
1st Step: Determine your Gross Total Income (GTI) for the financial year
2nd Step: Calculate deductions you are eligible for under the old tax regime like Sec 80C, HRA, home loan interest, NPS etc.
3rd Step: Deduct the total deductions from GTI to arrive at Taxable Income under the old regime.
4th Step: Based on this Taxable Income, calculate tax liability under the old regime tax slab rates.
5th Step: Now, compare this with your tax liability under the new regime. Under the new regime, deductions are not allowed so Taxable Income = GTI.
6th Step: Apply the new regime tax rates on this GTI to determine tax liability under the new structure.
7th Step: Compare tax payable under both regimes and choose the regime with lower tax liability.
Let’s understand this with an example:
Ganesh has a Gross Total Income of ₹10 lakhs for FY 2023-24. His deductions under the old regime are:
- Standard Deduction: ₹50,000
- Sec 80C investments: ₹1.5 lakhs
- Home Loan Interest: ₹75,000
Taxable Income under Old Regime
Gross Total Income: ₹10 lakhs
Less Deductions
- Standard Deduction: ₹50,000
- Sec 80C: ₹1.5 lakhs
- Home Loan Interest: ₹75,000
Taxable Income = ₹10 lakhs – ₹50,000 – ₹1.5 lakhs – ₹75,000 = ₹8.25 lakhs
Tax on this under old regime is ₹45,000 (as per old regime tax slabs)
Under the New Regime, he cannot claim deductions.
Taxable Income = Gross Total Income = ₹10 lakhs
Tax on this under new regime is ₹54,600
In this case, old regime brings down Ganesh’s tax liability from ₹54,600 to ₹45,000.
Therefore, old regime is more beneficial for Ganesh.
Use this approach to determine which system results in lower tax for your specific income and investments.
When Does the New Tax Regime Make More Sense?
Based on the above analysis, here is when choosing the new tax regime could be more beneficial:
- If your total deductions under old regime are lesser than ₹1.5 lakhs – The new regime results in lower tax.
- If you are unable to make full use of Section 80C limit – With lower 80C investment, the new regime provides better savings.
- For income above ₹15 lakhs – The new regime tax rates are more friendly at higher incomes.
- For non-salaried individuals like freelancers – They cannot claim many exemptions that salaried can like HRA, LTA.
- Those living in rent-free accommodation provided by employer – They are unable to claim HRA exemption.
- Senior citizens earning interest income – They can now claim higher deduction u/s 80TTB under the new regime.
- Those with income up to ₹7 lakhs – The higher rebate limit means zero tax.
Therefore, do your math thoroughly. For many middle class taxpayers, the new tax regime may be more optimal after the recent changes.
Things to Consider Before Choosing Old or New Tax Regime for Salaried Employees
Here are some important considerations when deciding between the new and old income tax regimes:
- Do a tax calculation for both regimes – This is crucial to determine which results in lower liability.
- Factor in current deductions – Account for all deductions you claim like 80C, HRA etc. Missing out on any could impact your calculations.
- Consider your likely deductions next year – Will you be able to make full use of 80C next year as well? Project your deductions for the coming year.
- Your life stage and needs – If you are in your peak earning years and make substantial investments, old regime may work better.
- Changes in income – If you expect a significant jump in your income, the lower new regime rates at higher incomes could benefit.
- Home loan – The old regime allows home loan interest deduction. If you have a large home loan, evaluate this.
- Flexibility – Remember you can switch between the two regimes every year. Pick what works best for that year.
Conclusion: Evaluate Your Tax Scenario Before Deciding Old tax regime or New tax regime
The new income tax regime comes with its pros and cons. The reduced rates offer simplicity and ease of compliance. However, for taxpayers with substantial deductions, the math may still work better under the old regime.
Ensure you do an in-depth analysis based on your income level, available deductions, lifestyle, and tax planning considerations. This will provide clarity on the tax regime ideal for your specific situation.
Switching to the new one just because it is the default option now could be counterproductive if your tax liability is lower under the old regime. Carefully evaluate both scenarios before you make an informed decision. With the freedom to switch between the two every year, you can always optimize your taxes based on your situation each year.
FAQs
Which tax regime is better for a ₹10 lakh income? Old tax regime or New tax regime?
- For income of ₹10 lakhs, the old tax regime is more beneficial if your total deductions under it exceed ₹2.5 lakhs. At lower deductions, the new regime results in lower tax outgo.
I have income from freelancing, which is better?
- The new tax regime works better in case of income from freelancing, business etc. since you cannot claim many exemptions allowed for salaried individuals under the old regime.
Is the new regime suitable for senior citizens?
- Yes, the new regime can be considered by senior citizens as they can now claim higher deduction of ₹50,000 u/s 80TTB on saving account interest income.
I have a home loan, should I switch to the new regime?
- If you have a home loan, do assess your tax liability with the home loan interest deduction under the old regime vs without it under the new one. Based on this calculation, make your decision.
I have income above ₹15 lakhs, what should I choose?
- At higher incomes above ₹15 lakhs, the new regime could be more beneficial as the tax rates are lower compared to the old regime. Do check once by calculating tax liability under both.
With both regimes having distinct pros and cons, doing an in-depth analysis is vital to make the tax-savvy decision on choosing between the old vs new income tax regime based on your specific situation.
