Old Vs New Tax Regime
Which is Better for Salaried Taxpayers

As the new financial year kicks off, salaried individuals in India are faced with a choice: stick with the tried-and-true old tax regime or venture into the newer alternative regime introduced by the government. In this blog, we're breaking down the complexities of both options to help you make a smart decision based on your financial situation.

New Tax Regime

Budget 2020 brought forth a new tax system with tax rates that were concessional. However, significant deductions like HRA, LTA, 80C, and several others were not available to individuals who chose the new tax system. As a result of this Less taxpayers choose this regime. Hence, in Budget 2023, to make the new tax regime more lucrative, the following key changes were introduced:-

• Default Regime:- New tax regime is set as a default regime which means if you haven’t informed your employer about which regime to choose from, the TDS calculation will be done on the basis of the new tax regime only from FY 23-24.
• Tax Rate:- The basic exemption limit under the new tax regime has been raised to Rs 3 lakh from Rs 2.5 lakh from FY 23-24 to make the new tax regime more attractive. Also, the highest tax rate of 30% will be levied above Rs 15 lakh income.
• Rebate Limit:- The rebate under section 87A has been hiked to Rs 7 lakh from Rs 5 lakh under the new tax regime from FY 23-24. The rebate benefit will be up to Rs 25000, provided income doesn't exceed the limit of 7 lakhs.
• Standard Deduction:- Individuals having salary income can claim a standard deduction of Rs. 50,000 from their gross salary income from FY 23-24. Family pensioners opting for the new tax regime can claim a standard deduction of Rs 15,000 from their pension income.
• Slashed the surcharge limit:- Reduction in the surcharge on annual income above 5 crores from 37% to 25% under the new regime. The highest tax rate is 42.74%, which would slash the maximum tax rate to 39% after this reduction.
• Tax Slabs:- The new tax regime has reduced the income tax slabs. The revised tax structure as per the new tax regime is:-

Old Tax Regime

The old tax regime, a system that has been in place for years, follows a progressive tax structure with different slabs and corresponding rates. Salaried individuals availing this regime can claim more than 70 deductions and exemptions to claims like Section 80C, HRA, LTA, and more thereby reducing their taxable income.

How to decide which tax regime is better: New Tax Regime or Old Tax Regime

Deciding between the New Tax Regime and the Old Tax Regime involves considering various factors based on your individual financial situation and preferences like:

1. Understand the Key Differences

• Old Tax Regime: Follows a multi-slab tax structure with various deductions and exemptions available.
• New Tax Regime: Offers reduced tax slabs but comes with limited deductions and exemptions.

2. Evaluate Your Income Level

Under the new tax regime, the tax rates are lower than the old tax regime. The new tax regime may be more beneficial if you have a higher income. As per budget 2023, an individual with INR 9 lakh annual income will have to pay INR 45,000 as tax, which is 5% of the taxable income. This represents a reduction of INR 47,500 from the INR 92,500 tax liability that the same individual would have had under the old tax regime.

3. Assess Eligible Deductions   

Consider the deductions you currently avail under the Old Tax Regime. If these deductions significantly reduce your tax liability, sticking with the Old Regime might be advantageous.

4. Simplify Your Tax Planning 

If you prefer a simpler tax structure and don't want to navigate numerous deductions, the New Tax Regime may be more suitable.

5. Evaluate Future Financial Goals

Consider your short-term and long-term financial goals. If you have significant financial commitments and can benefit from available exemptions, the Old Tax Regime might align better with your goals. However, The new tax regime suits you if you are flexible with your investments and looking forward to not investing in tax-saving instruments.

6. Calculate Tax Liability in Both Regimes  

Use online tax calculators or consult a tax professional to estimate your tax liability under both regimes. This will give you a clearer picture of which regime is more tax-efficient for you.

7. Review Investment Portfolio   

If your investment portfolio includes instruments with tax benefits (e.g., ELSS under 80C), assess the impact of losing these benefits under the New Tax Regime.

8. Factor in HRA and Other Allowances  

If you receive House Rent Allowance (HRA) or other allowances, consider how these impact your taxable income under both regimes.

Can Salaried Individuals change the Tax Regime during the Year 

A salaried taxpayer should choose the tax regime at the beginning of FY and intimate their employer. The employee cannot change their choice anytime during the financial year. However, they can change their choice at the time of filing the income tax return.

If an employee does not select a tax regime at the start of the financial year, the employer will deduct tax (TDS) under the New tax regime because, according to the proposed budget 2023, the New tax regime will be the default tax regime from A.Y 2024-25. However, a salaried taxpayer has a option to switch between old and new Tax regime every financial year i.e they can chose the new tax regime in one year and choose the regular tax regime in another year.

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