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Since the introduction of the revised income tax system in India in 2020, taxpayers have been faced with the choice between the old deduction-heavy tax regime and the newer streamlined structure. With the Union Budget 2023-24 making the new tax regime the default option, taxpayers must actively opt for the old regime if they prefer it. So, which option is better?
The answer depends on factors like your employment status, available exemptions, deductions, savings, and investment preferences.
The Old Tax Regime
The old tax system is designed for those who invest in tax-saving schemes, offering over 70 exemptions and deductions. Some key benefits include:
- Section 80D: Deductions on health insurance premiums.
- HRA and LTA: Exemptions on house rent and leave travel allowance.
- Home Loan Interest: Up to Rs 2 lakh under Section 24(b). While it provides tax relief for those who save and invest in specific areas, it requires detailed documentation and careful planning.
The New Tax Regime
Introduced in FY 2020-21, the new tax regime simplifies taxation by reducing tax rates and eliminating most exemptions and deductions. It’s ideal for taxpayers with fewer investments or those who prefer easier tax management.
Key changes in Budget 2023 include:
- Revised Tax Slabs (FY 2024-25):
- Up to Rs 3 lakh: No tax
- Rs 3 lakh – Rs 6 lakh: 5%
- Rs 6 lakh – Rs 9 lakh: 10%
- Rs 9 lakh – Rs 12 lakh: 15%
- Rs 12 lakh – Rs 15 lakh: 20%
- Above Rs 15 lakh: 30%
- Increased Tax Rebate: The tax-free income threshold has been raised to Rs 7 lakh (from Rs 5 lakh) under Section 87A.
- Standard Deduction: Salaried individuals can claim Rs 50,000 as a standard deduction, raising tax-free income to Rs 7.5 lakh.
- Surcharge Reduction: The surcharge on income above Rs 5 crore has been reduced from 37% to 25%, lowering the effective tax rate from 42.74% to 39%.
Comparative Analysis: Old vs New Tax Regime
| Income Level | Tax Savings in Old Regime (with Deductions) | Tax Under New Regime (Post-Budget 2023) |
|---|---|---|
| Rs 7 lakh | Zero tax (with full Section 80C utilization) | Zero tax (due to revised rebate) |
| Rs 10 lakh | Rs 54,600 (with Rs 2.5 lakh deductions) | Rs 54,000 |
| Rs 15 lakh | Rs 1,95,000 (with Rs 4 lakh deductions) | Rs 1,50,000 |
If your deductions are below Rs 1.5 lakh, the new regime offers a better tax advantage. However, if your deductions exceed Rs 3.75 lakh, the old regime might be more beneficial.
Who Benefits More from Each Regime?
- New Tax Regime: Ideal for individuals with limited investments or non-salaried taxpayers who don’t qualify for many exemptions. It’s perfect for those seeking simplicity and fewer compliance requirements.
- Old Tax Regime: Best suited for salaried individuals or those with substantial savings and investments. It offers greater benefits for those who maximize deductions like Section 80C and HRA.
Budget 2023 Enhancements for the New Regime
The government has made the new regime more attractive with:
- Higher Tax-Free Threshold: Income up to Rs 7.5 lakh is now exempt, including the Rs 50,000 standard deduction.
- Leave Encashment Exemption: Non-government employees can now claim up to Rs 25 lakh as leave encashment on retirement (up from Rs 3 lakh).
- Simplified Tax Slabs: The new tax system offers lower and fewer rates compared to the old regime.
The choice between the old and new tax regimes depends on individual financial situations. If your annual deductions exceed Rs 3.75 lakh, the old regime might be more beneficial. However, for those prioritizing simplicity and fewer compliance requirements, the new regime is the better option. Taxpayers should carefully review their income, expenses, and investment patterns and consider using tax calculators or consulting a tax advisor to make an informed decision.
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