Old and new tax regimes often become a major point of discussion, especially when the financial year-end approaches, leaving many taxpayers unsure about which option offers better tax savings. Tax planning is a crucial part of effective financial management, and the introduction of the new tax regime in India has given taxpayers the flexibility to choose between two systems based on their income structure and financial goals.
Are you facing the same dilemma? Let’s simplify the comparison and help you understand which tax regime may suit you better.
Understanding the Old and New Tax Regimes
Old Tax Regime
The old tax regime remains popular among Indian taxpayers because it offers a variety of deductions and exemptions. Under this regime, more than 70 deductions and exemptions are available, reducing overall tax liability.
Key Highlights:
- Basic Exemption Limit: Rs 2.5 lakh
- Tax Rebate: Offers a tax rebate of up to Rs 12,500 if the total income is below Rs 5 lakh
- Deductions and Exemptions: Includes exemptions like HRA, LTA, and deductions under sections 80C, 80E, 80EEB, 80U, 80TTA, and more.
New Tax Regime
Introduced in 2020, the new tax regime is now the default option, with taxpayers having the choice to opt for the old regime while filing their returns. Unlike the old regime, the new tax regime does not allow certain deductions such as 80C, 80D, HRA, and LTA, making it seem less attractive at first glance. However, it offers a simplified structure with lower tax rates.
Key Highlights:
- Basic Exemption Limit: Rs 3 lakh
- Standard Deduction: Extended deductions of Rs 75,000 compared to Rs 50,000 in the old regime
- Tax Rebate: Offers a tax rebate of up to Rs 25,000 compared to Rs 12,500 in the old regime
Old vs New Tax Regime Slabs
Under the new tax regime, slab rates remain the same for individuals, senior citizens, and super senior citizens, unlike the old tax regime, where they vary.
Switching Tax Regimes: Is It Possible?
Many taxpayers wonder whether they can switch between the old and new tax regimes each year. The answer depends on the type of income:
Salaried individuals with business or professional income cannot switch regimes every year. If they opt out of the new regime, they can switch back only once. After that, they must stick to the new regime permanently.
Individuals with non-business income can switch between the old and new tax regimes every year. However, opting for the old tax regime must be done before the income tax return filing deadline.
Deductions and Exemptions: Old vs New Tax Regime
Understanding tax slabs alone is not enough. It is essential to compare the deductions and exemptions available under both regimes to make an informed decision.
Old vs New Tax Regime: Which is Better for You?
There is no one-size-fits-all answer when choosing the best tax regime. Here are some steps to help you decide:
Steps to Choose Between the Old and New Tax Regime
Understand the Basics: The old tax regime allows various exemptions and deductions (e.g., 80C, HRA, LTA). The new regime offers lower tax rates but fewer deductions.
Consider Your Income Level: If your taxable income is below Rs 7 lakh, the new tax regime may be beneficial due to the full tax rebate under Section 87A. For higher income levels, compare the total tax liability under both regimes.
Evaluate Deductions & Exemptions: If you claim deductions like 80C, 80D, HRA, and home loan interest, the old tax regime may offer better savings. If you don’t claim major deductions, the new tax regime with lower rates might be preferable.
Consider Flexibility: Salaried individuals without business income can switch between tax regimes yearly. Those with business income can switch only once after opting out of the new regime.
Think About Long-Term Tax Planning: If you prefer tax-saving investments, the old regime offers more benefits. If you want a simpler, deduction-free approach, the new regime is ideal.
Wrapping Up
Choosing between the old and new tax regimes depends on your financial situation, tax-saving habits, and income level. If you actively invest in tax-saving instruments and claim deductions, the old tax regime may provide greater savings. However, the new regime offers a simplified tax structure with lower rates and minimal paperwork.
Ultimately, the best approach is to calculate your tax liability under both regimes and select the one that reduces your tax burden the most. With careful planning and an understanding of available deductions, you can make an informed decision.
*This article is for informational purposes only. This is not investment advice.
*Disclaimer: Teji Mandi Disclaimer
FAQs
What is the difference between the old and new tax regime?
The old tax regime allows various deductions and exemptions, such as Section 80C, 80D, and HRA, but has higher tax rates. The new tax regime offers lower tax rates but allows very limited deductions and exemptions.
Which tax regime is better: old or new?
The better regime depends on your income level and the deductions you can claim. Taxpayers should compare their tax liability under both regimes using an income tax calculator before making a decision.
Is the old tax regime beneficial for investors?
Yes, investors who use tax-saving instruments such as insurance, equity-linked investments, retirement funds, and deposits may find the old tax regime more beneficial due to available deductions.
Is the old tax regime beneficial for NRIs?
Yes, most tax-saving deductions are available to NRIs, except for a few like Section 80TTB. NRIs can claim deductions under sections such as 80C and 80D under the old tax regime, subject to eligibility.
Is it mandatory to inform the employer about the chosen tax regime?
Yes, salaried employees must inform their employer about their chosen tax regime during the year. If not informed, the employer will deduct tax as per the default new tax regime under Section 115BAC.
Can an employee change the tax regime while filing the ITR?
Yes, intimating the employer does not count as a final choice. The employee must select the desired tax regime separately while filing the income tax return before the due date under Section 139(1).
Can HRA exemption be claimed in the new tax regime?
No, House Rent Allowance exemption under Section 10(13A) is available only in the old tax regime and not in the new tax regime.
Are there special tax benefits for senior citizens in the new tax regime?
In the old tax regime, senior citizens had a higher basic exemption limit. In the new tax regime, tax is not payable on total income up to Rs 7 lakh due to the rebate under Section 87A.
Is the Rs 50,000 standard deduction available in the new tax regime?
Yes, the standard deduction of Rs 50,000 is available under both old and new tax regimes from AY 2024-25 onwards.
Can Chapter VI-A deductions like 80C and 80D be claimed in the new tax regime?
No, most Chapter VI-A deductions cannot be claimed in the new tax regime, except deductions under Sections 80CCD(2), 80CCH, and 80JJAA.
Can taxpayers switch between old and new tax regimes every year?
Individuals with non-business income can switch between the two regimes every year. Taxpayers with business or professional income have limited switching options and must follow the rules under Section 115BAC.
I have business income. Do past regime choices apply for AY 2024-25?
No, the new tax regime is the default for AY 2024-25. Taxpayers with business income must submit Form 10-IEA again if they want to opt for the old tax regime.
