Tax burden alleviated | Image:Pixabay
New Tax Regime vs Old Tax Regime: Amidst the aftermath of the budget, taxpayers are grappling with a perplexing dilemma: Should they stick with the familiar old tax regime or embrace the relatively new tax regime? Experts shed light on how the optimal choice between the two regimes varies depending on individual circumstances, including deductions and income levels.
“Depending on individual circumstances, deductions, and income levels, the optimal choice between the two regimes varies. For some, the old regime might prove more beneficial, while for others, the new regime could offer a more streamlined and efficient tax planning avenue,” said Arpit Suri, CA and personal finance expert.
The new tax regime
Introduced in the Budget of 2020, the new tax regime brought about a seismic shift in India’s tax landscape. It offered a revised set of tax slabs coupled with concessional rates, seemingly promising a simpler and more taxpayer-friendly approach. However, the catch lay in the fine print – the new regime disallowed several exemptions and deductions that were once pillars of tax planning for individuals. This exclusion, including popular ones like HRA, LTA, and Section 80C, left many taxpayers apprehensive about embracing the new system.
Despite its initial lukewarm reception, the new tax regime received a facelift. The government, in its bid to encourage adoption, introduced five pivotal changes:
Higher tax rebate limit: The rebate threshold was elevated to Rs 7 lakh, effectively rendering individuals earning up to this amount exempt from paying any tax.
Streamlined tax slabs: With tax exemption now extended up to Rs 3 lakh, the revised slabs offered a more graduated approach, starting from 5 per cent.
Standard deduction and family pension deduction: The standard deduction of Rs 50,000, once exclusive to the old regime, was extended to the new regime as well, offering taxpayers additional relief. Furthermore, adjustments were made for family pension deductions.
Reduced surcharge for high net worth individuals: In a move aimed at providing relief to high-income earners, the surcharge rates for income exceeding Rs 5 crore were slashed, leading to a reduction in the effective tax rate.
Higher leave encashment exemption: Non-government employees witnessed a significant eight-fold increase in the exemption limit for leave encashment, from Rs 3 lakh to Rs 25 lakh.
Notably, the new tax regime was made the default option starting from FY 2023-24, requiring taxpayers to actively opt for the old regime if they wished to continue with it.
The old tax regime
The old tax regime, preceding the new system, offered approximately 70 deductions and exclusions, including significant ones like House Rent Allowance (HRA) and Leave Travel Allowance (LTA). Notably, Section 80C allowed for a reduction in taxable income of up to Rs. 1.5 lakh. Taxpayers had the flexibility to choose between the old and new regimes, with deductions covering areas such as standard deductions for salaried individuals and relief for interest on home loans. However, exceeding certain contribution limits, like Rs. 7.5 lakh for EPF and NPS, could incur tax liability. Overall, the old regime provided various avenues for taxpayers to minimise tax payments through legitimate exemptions and deductions.
Tax under old vs new regime
When considering whether to opt for the old or new tax regime, it’s crucial to assess the impact of deductions on your overall tax liability. A key factor in this decision-making process is the total amount of deductions claimed. If your total deductions amount to Rs 1.5 lakh or less, it’s likely that the new regime will be more beneficial for you. On the other hand, if your deductions exceed Rs 3.75 lakh, sticking with the old regime may prove advantageous. For individuals with total deductions falling between Rs 1.5 lakh and Rs 3.75 lakh, the optimal choice between the two regimes will depend on your specific income level and circumstances.
