April 26,2023
The old and new tax systems in India: Which one is right for you in FY 2023-2024?
Article summary:
India’s tax system is changing. While the new tax regime is simpler, it offers fewer deductions and exemptions than the old regime. It’s important to compare the two regimes carefully to find the best fit for you.
Are you wondering which tax system to choose in India? You’re not alone. It’s a common question these days. The Indian government has made a few changes to the new tax system to make it more appealing to taxpayers, however some of us are still confused about its pros and cons vis-à-vis the old tax system.
In this guide, we’ll lay out the key details of each system. By the end, you’ll have a clear picture of which one might be the best fit for you. So let’s get started on the journey to simplify your taxes!
Basic terms in the Indian tax system
Let’s begin with a quick overview of some of the most important tax terms. This makes it easier to read and review tax documents.
| Term | Definition |
|---|---|
| Income | Your income is the money earned from salary, business, investments, etc. It is the basis for tax calculation. |
| Exemptions | This is the amount of income that is not taxed, e.g., up to INR 2.5 lakh under the new regime. |
| Deductions | Deductions are expenses that can be subtracted from your income before tax calculation. For example, the standard deduction of INR 40,000 is available to all taxpayers under the new tax regime. |
| Taxable income | This is the amount of income that is subject to tax—basically, your income after you have subtracted your exemptions and deductions. |
| Tax liability | Your tax liability is the amount of tax that you have to pay to the government. It is calculated by multiplying your taxable income by the applicable tax rates. |
| Tax slabs | The different income brackets that are used to calculate your tax liability are known as tax slabs. |
| Tax rates | The percentage of your taxable income that you have to pay as tax is your tax rate. The tax rates vary depending on your income slab. |
| Tax refund | This is the amount of money that you get back from the government if you have overpaid your taxes. |
| The due date for filing returns | Usually, the deadline to submit income tax returns (ITR) without getting a late fee is the 31st of July. |
| Rebate | This is a reduction in the total tax liability where eligible individuals under the Income Tax Act receive a refund or pay a reduced amount of tax to the government. |
| Assessment year | This is the financial year for which your tax liability is being determined. For example, the assessment year for 2022-23 is 2023-24. |
India’s tax system is changing
In the 1960s, India introduced a traditional tax system that was based on a simple principle: the more you earn, the higher your tax rate. This system was designed to boost savings, support social welfare, and encourage economic growth. But over time, it became more complex, with a variety of deductions and exemptions.
Introduction of the new tax regime
In 2020, the government introduced a new tax regime that simplified the old tax system and made it more taxpayer-friendly. The new tax structure has more slabs and lower rates, however, it also offers fewer deductions and exemptions.
The new tax regime was optional at first, but in the 2023 Budget, Finance Minister Nirmala Sitharaman announced that it would become the default option for taxpayers from FY24. This means that most taxpayers will now be on the new tax regime by default unless they choose to opt out.
Detailed comparison: Old vs. new tax regime
To help you decide which tax regime is better for you, here’s a brief comparison of the tax slabs and rates in the old and new tax regimes in India.
Table: 1 Tax slabs and rates | Tax slabs under the old tax regime | Old income tax rates | Tax slabs under the new tax regime | New income tax rates |
| :--- | :--- | :--- | :--- |
| INR 0 – 2.5 lakh | 0% | INR 0-3 lakh | 0% |
| INR 2.5 lakh – 5 lakh | 5% | INR 3 lakh – 6 lakh | 5% |
| INR 5 lakh – 10 lakh | 20% | INR 6 lakh – 9 lakh | 10% |
| INR 10 lakh & above | 30% | INR 9 lakh-12 lakh | 15% |
| | | INR 12 lakh-15 lakh | 20% |
| | | INR 15 lakh & above | 30% |
Deductions and exemptions under the old tax regime
The old tax regime offered a number of deductions and exemptions to reduce taxable income. Some of the notable deductions include:
- Section 80C: This is one of the most popular deductions. It allows for deductions on investments made in Provident Fund (PF), Public Provident Fund (PPF), National Savings Certificate (NSC), and premiums paid on Life Insurance. For instance, if you’ve invested INR 1 lakh in PPF and INR 50,000 in life insurance in a year, you can claim a total deduction of INR 1.5 lakh under this section.
- Section 80D: This section caters to those who pay premiums on health insurance for themselves, their family, or their parents. For example, if you’ve paid a premium of INR 25,000 for your health insurance and another INR 30,000 for your parent’s health insurance, both amounts can be claimed under this section.
Exemptions under the old regime include benefits like House Rent Allowance (HRA) for those paying rent, Leave Travel Allowance (LTA) for travel expenses during leave from work, and a standard deduction of INR 50,000 on salary income.
Deductions and exemptions under the new tax regime:
The new tax regime, introduced as an alternative to the old one, offers reduced tax rates but at the cost of most deductions and exemptions. The idea is to simplify the tax structure, making it easier for taxpayers.
While the new regime does away with many deductions, it still retains a few. For instance:
- Section 80CCD(2): This pertains to the employer’s contribution to the pension account of the employee. If your employer contributes to your pension fund, a portion of that can be claimed as a deduction.
However, many of the popular exemptions like HRA, LTA, and standard deductions available in the old regime are not available in the new one. This means that while you might benefit from lower tax rates in the new regime, you’ll have fewer avenues to reduce your taxable income through deductions and exemptions.
For a side-by-side comparison of the old and new tax systems, check out the table below.
Table 2: Overview of the old and new tax regimes
| Parameter | Old tax system | New tax system |
|---|---|---|
| Progressive | Yes | Yes |
| Number of slabs | 4 | 7 |
| Basic exemption limit | INR 2.5 lakh | INR 3 lakh |
| Lowest tax rate | 5% (for income between INR 2.5 lakh and INR 5 lakh) | 0% (for income up to INR 3 lakh) |
| Highest tax rate | 37% (for income above INR 5 crore) | 30% (for income above INR 15 lakh |
| Number of deductions and exemptions | More than 70 | Less than 10 |
| Rebate under section 87A | Up to INR 12,500 (for income up to INR 5 lakh) | Up to INR 12,500 (for income up to INR 7 lakh) |
How to pick the best tax regime for you
Clearly, both the old and new tax regimes have their own advantages and drawbacks, so there is no ‘right’ or ‘wrong’ choice. It’s about what works for you. You need to figure out which tax regimes suits your personal financial situation best and aligns most closely with your personal financial goals.
If you often use deductions because of your investments or expenses, you might find the old regime more beneficial. On the other hand, if you prefer a straightforward approach without getting into the nitty-gritty of taxes, the new regime could be a better fit.
Remember, you’re not locked into one choice. You can switch if you feel another regime suits you better later on. However, before making any decisions, it’s advisable to talk with a tax expert.
Wrapping up: Points to remember
- The new tax regime is simpler than the old tax regime, but it offers fewer deductions and exemptions.
- You can opt for the old or new tax regime, but you cannot switch between the two in the same financial year.
- If you file your returns late, you may have to pay a penalty. The penalty for late filing of returns is INR 5,000 for the first month of delay and INR 100 for every day of delay thereafter.
- If you are unsure which tax regime is right for you, consulting with a tax expert is best.
Disclaimer
The investment options and stocks mentioned here are not recommendations. Please go through your own due diligence and conduct thorough research before investing. Investment in the securities market is subject to market risks. Please read the Risk Disclosure documents carefully before investing. Past performance of instruments/securities does not indicate their future performance. Due to the price fluctuation risk and the market risk, there is no guarantee that your personal investment objectives will be achieved.
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