As India continues to modernise its taxation system, the introduction of the new tax regime by the government of India has provided taxpayers with a choice between two distinct tax regimes: the old tax regime and the new tax regime. Announced in the Union Budget 2020, the new tax regime applies for the Financial Year (FY) 2024-25 and beyond, offering taxpayers an alternative structure with revised income tax rates and fewer deductions. Both regimes are designed to help taxpayers optimise their tax savings, but each comes with its own set of benefits and limitations. In this post, we will explore the key differences between the Old and New Tax Regimes, weigh their advantages and disadvantages, and provide guidance on choosing the right regime based on your unique financial profile.
Old tax regime
The old tax regime is based on the traditional structure where taxpayers can claim a variety of deductions and exemptions to reduce their taxable income. These deductions could be related to investments, insurance premiums, housing loans, and other allowances. The system provides tax reliefs and exemptions aimed at encouraging long-term savings and investments.
New tax regime
The new tax regime, introduced in the 2020 Budget, eliminates most of the deductions and exemptions available under the old tax regime. The new tax regime, however, offers lower tax rates across all income slabs to simplify the process. It’s designed to make tax filing more straightforward, especially for individuals who do not claim significant deductions or exemptions.
How do they work?
Let’s break down how each tax regime functions, with a focus on the tax rates and eligibility for exemptions or deductions.
Old tax regime:
In the old tax regime, you can reduce your taxable income by availing deductions for a variety of expenses, such as:
Section 80C: This includes deductions for investments in options like the Public Provident Fund (PPF), National Savings Certificate (NSC), life insurance premiums, and Employee Provident Fund (EPF). You can invest up to ₹1.5 lakh in a financial year and claim tax relief.
Section 80D: This provides deductions for premiums paid for health insurance. Depending on the policy, taxpayers can claim deductions for premiums for themselves, their spouse, children, and parents.
House Rent Allowance (HRA): If you live in a rented property, you can claim a deduction on your rent under HRA provisions.
Interest on home loan: You can claim deductions on the interest paid for housing loans under Section 24.
Other deductions: You can also avail deductions for donations to charitable organisations, tuition fees for children, and even certain retirement fund contributions.
After applying these deductions, the remaining taxable income is subject to tax at the applicable rates.
New tax regime:
Under the new tax regime, the deductions and exemptions mentioned above are not available. The primary focus of the new tax regime is to offer simplified tax slabs with lower tax rates. Here are the key features of this regime:
No deductions or exemptions: There’s no option to claim deductions like those under Section 80C, 80D, HRA, or home loan interest.
Lower tax rates: In exchange for forgoing deductions, the new regime provides reduced tax rates across all income slabs.
Tax slabs in the new regime:
₹2.5 lakh to ₹5 lakh – 5%
₹5 lakh to ₹10 lakh – 20%
₹10 lakh and above – 30%
This regime is designed to simplify the tax process by reducing the need for paperwork related to deductions and exemptions.
Here’s a quick comparison of tax slabs and rates for both regimes:
Benefits of the old tax regime
Tax deductions and exemptions:
The biggest advantage of the old tax regime is the ability to reduce your taxable income through a wide range of deductions. If you are someone who regularly invests in tax-saving instruments or spends on medical insurance and education, this could lead to significant tax savings.
Example: If you invest ₹1.5 lakh in PPF and pay ₹25,000 in health insurance premiums, you can claim tax deductions under Section 80C and Section 80D, effectively lowering your taxable income.
Higher taxable income slabs for certain groups:
In the old tax regime, higher income earners who can avail of multiple deductions benefit from the tax-saving opportunities. As a result, their taxable income is reduced significantly, resulting in a lower tax outgo.
Example: A person earning ₹10 lakh with HRA and home loan deductions could have a much lower taxable income than a person earning the same amount in the new tax regime.
Benefits of the new tax regime
Lower tax rates:
One of the most attractive features of the new tax regime is the lower tax rates. Without the need to account for various deductions, the tax burden is much lighter.
Example: If you earn ₹8 lakh under the new tax regime, your tax liability will be only ₹45,000, compared to ₹80,000 under the old tax regime (if no deductions are claimed).
Simplified process:
The new tax regime makes the tax filing process more straightforward by removing the need to track and report deductions. This makes it an ideal choice for people who prefer a simpler, hassle-free tax return filing process.
Better for low to middle-income taxpayers:
For individuals in the middle-income group who don’t claim a lot of deductions, the new tax regime is especially beneficial. With its lower tax rates, they may end up paying less tax compared to the old tax regime.
Example: A person earning ₹5 lakh would benefit from paying 5% tax under the new regime, without having to worry about qualifying for exemptions or maintaining investment proof.
Drawbacks of tax regime
Old tax regime
While the old tax regime offers more opportunities to save on taxes, it does come with its own set of drawbacks:
Complexity in filing: With multiple deductions, exemptions, and detailed paperwork involved, filing taxes under the old tax regime can be cumbersome. Taxpayers need to keep records of various receipts, proof of investments, and insurance policies, which could lead to errors or missed claims.
Limited tax rate reduction: If you are someone who doesn’t claim many deductions or exemptions, you may find the old tax regime less advantageous. The higher tax rates and complex filing process may outweigh the benefits.
New tax regime
Though the new tax regime offers simplicity and lower rates, it’s not for everyone:
No deductions or exemptions: One of the biggest downsides of the new tax regime is that it does not allow any deductions, such as those for PPF, EPF, home loan interest, or health insurance. For individuals who typically claim these deductions, the new tax regime may not offer as much benefit.
Not Ideal for high-income earners with deductions: If you earn a higher income and have significant deductions, such as HRA, 80C investments, or home loan interest, the old tax regime may be more advantageous. The New Tax Regime would not allow you to avail of these deductions, potentially resulting in higher taxes paid.
Which regime is right for you?
Choosing between the old and new tax regimes depends on your specific financial situation. Here’s a guide:
How many deductions can you claim?
If you can claim substantial deductions, the old tax regime will likely be more beneficial.
If you do not typically invest in tax-saving instruments, the new tax regime may be the better choice.
Do you want simplicity?
If you prefer a simplified tax filing process with lower tax rates and no deductions to track, the new tax regime is perfect for you.
Your income level:
For individuals with moderate income and fewer deductions, the new tax regime offers lower taxes.
For higher-income individuals with multiple deductions, the old tax regime could lead to better savings.
Is the new tax regime the future?
The new tax regime is designed for simplicity, offering lower tax rates in exchange for the loss of deductions and exemptions. It’s a great choice for individuals who do not want to track investments or maintain detailed financial records. However, the old tax regime still has significant value, especially for individuals who can optimise deductions to reduce their taxable income.
Ultimately, the choice depends on your personal financial situation and how much time and effort you are willing to invest in managing deductions. Both regimes offer opportunities to save taxes, and by evaluating your financial needs, you can make the right choice. Remember, you can opt for the best regime every financial year, based on your income and tax-saving investments.
