1. Old vs new tax regime: What to choose and why

Old vs new tax regime: What to choose and why

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Upstox

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5 min read • Updated: February 12, 2024, 7:44 PM

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Summary

The old regime, with all its exemptions and deductions, is suitable for those taxpayers who have enough tax saving investments, otherwise the new regime is your go to option. Notably, there is no one-size-fits-all when it comes to choosing the right tax regime.

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Under the new tax regime the exemption limit has been increased from ₹2.5 lakh to ₹3 lakh while there are 5 different tax slabs for taxable income above ₹7.5 lakh.

Ever since the changes in the income tax system in 2020, taxpayers have been facing a choice dilemma: old tax regime or the new tax regime? The shift from the traditional income tax system has altered how individuals and Hindu undivided families (HUF) calculate their tax liabilities.

In Budget 2023, the government made the new tax regime default regime from FY 2023-24. The government’s move was aimed at encouraging more taxpayers to adopt the new regime.

This means, the taxpayers who won’t opt out from the default regime their tax liability will be calculated under the new tax regime.

The new tax regime offers lower tax rates compared to the old regime, but without most of the deductions and exemptions under various sections of the Income Tax Act, 1961.

As the financial year 2023-24 is going to end soon, it could be a dilemma for many to choose between the old and the new tax regimes. In this article, we delve into the nuances of both the tax regimes to help you make an informed choice.

Before exploring the pros and cons of both the regimes, it’s important to note that in the Interim Budget 2024, Finance Minister Nirmala Sitharaman did not make any changes to direct and indirect taxes. This means, the changes announced in Budget 2022 will continue for FY 2023-24.

Tax slabs: Old vs new tax regime

Under the new tax regime the exemption limit has been increased from ₹2.5 lakh to ₹3 lakh while there are 5 different tax slabs for taxable income above ₹7.5 lakh.

Let’s take a look at the tax slabs under both old and new tax regimes.

Tax slabs under the new tax regime

IncomeTax rate
Up to ₹ 3,00,000Nil
From ₹3,00,001 to ₹6,00,0005%
From ₹6,00,001 to ₹9,00,00010%
From ₹9,00,001 to ₹12,00,00015%
From ₹12,00,001 to ₹15,00,00020%
Above ₹15,00,00130%

Tax slabs under old tax regime

IncomeTax rate
Up to ₹ 3,00,000Nil
From ₹3,00,001 to ₹6,00,0005%
From ₹6,00,001 to ₹9,00,00010%
From ₹9,00,001 to ₹12,00,00015%
From ₹12,00,001 to ₹15,00,00020%
Above ₹15,00,00130%

Key changes in the new tax regime

Let's break it down. The new tax regime for the financial year 2023-24 has some key changes you should know about.

Firstly, the tax rebate under section 87A has climbed from ₹5 lakh to ₹7 lakh. So, if your income is up to ₹7 lakh, you're in the tax-free zone under the new regime.

The basic deduction of ₹50,000 has been brought back into the new regime as well, meaning, even less taxable income for you.

The taxpayers in high income brackets can rejoice, as the surcharge rate on incomes over ₹5 crore has been slashed from 37% to 25% in the new tax regime. This brings down the effective tax rate for those in the high-income bracket.

The Central Board of Direct Taxes (CBDT) has also made it easier to switch between the two regimes. Two new income tax return forms are available – ITR-1 (SAHAJ) and ITR-4 (SUGAM) – specifically for the Assessment Year 2024-25. If you're a salary earner, have a single house property, interest income up to ₹2 lakh, or agricultural income up to ₹5,000, you should choose ITR-1. You can now choose your preferred tax regime directly while filing the Income Tax Return (ITR).

If you want to stick with the old tax regime, you'll need to submit the Form 10-IEA.

These changes have been made to make the Income Tax Return filing process more convenient for everyone.

Does the old tax regime offer more benefits?

The old tax regime, existing before 2020, provides various deductions and exemptions, such as HRA, LTA and Section 80C investments. This regime suits those taxpayers better who have enough tax saving investments.

The decision to shift to the old tax regime could be taken based on the maximum deductions and exemptions you can claim.

Which regime to choose: Striking the right balance

The old regime, with all its exemptions, encourages a habit of saving. In contrast, the new regime is for those seeking simplicity, and not taking the burden of complex tax calculations. The decision between the old and new tax regimes is not one-size-fits-all.

If your annual income falls under a higher salary bracket and you have enough tax saving investments the old tax regime could be more suitable. On the other hand, the new tax regime may help you save more if you can’t claim maximum deductions under various sections of the I-T Act.

To sum up, selecting the right tax regime depends on your income level and the tax saving investments. Your investment goals and other financial aspects should also be taken into consideration before taking the final decision. It’s advisable to seek expert advice and follow due diligence before filing your ITR.