The Indian income tax system is one of the most complex in the world. There are a variety of different tax slabs, exemptions, and deductions that can be claimed, making it difficult for taxpayers to know how much tax they owe. In the Union Budget 2020-21, the government of India under the guidance of Finance Minister, Nirmala Sitharaman made an effort to simplify the income tax system and make it more taxpayer-friendly. That said, many taxpayers do not get the hang of the new tax regime and often find it difficult to relate it to the old tax regime as to which one is more beneficial for them.
In this article, we will explore the old income tax regime and the new income tax regime in India, their differences, and their impact on taxpayers.
What is the Old Tax Regime?
The old tax regime had a traditional system for many years following a single tax structure until the year 2020 in which citizens have the privilege of specific tax slabs based on their earnings to pay taxes and tax deductions on investments. It is vital to understand the old tax structure before we consider the differences between the old and the new tax regimes. Most taxpayers in our country use the old tax regimes to lower their taxable income through various ways despite the fact that it offers higher tax rates. The old tax regime had about 70 tax exemptions per the Income Tax Act 1961.
Deductions and Exemptions Under Old Tax Regime
As part of the old tax regime, taxpayers are allowed to claim various deductions and exemptions, such as medical expenses, education expenses, house rental allowance, leave travel allowance, and investments in certain specific financial instruments. Some of the deductions as part of the old tax regime are term life insurance premiums, equity-linked savings schemes (ELSS mutual funds), employee provident fund, public provident fund, health insurance premiums, NPS investments, children’s tuition fees, national savings certificates, tax saver fixed deposits, etc. These deductions helped taxpayers in reducing their taxable income and thereby the tax liability. Apart from this, the old tax regime allowed a few exemptions too such as Leave Encashment, Uniform Allowance, House Rent Allowance, Leave Travel Allowance, Mobile and Internet Reimbursement, Food Vouchers or Coupons, Company Leased Car, and Other Standard Deductions.
Advantages of Opting For the Old Tax Regime
There were a lot of deductions and exemptions available for taxpayers in the old tax regime in the form of different investments such as insurance plans, national pension system, provident fund, etc. and this was an added advantage to filing tax returns for most people.
Limitations of Old Tax Regime
1. Locked-in investments:
In order to reduce tax liability, taxpayers had to avail of the deductions available in the old regime and part of that was to vest into investments that had a lock-in period of three years in case of equity-linked mutual funds (or) five years in case of tax saving fixed deposits with banks.
Given the fact that there are over 70 exemptions available, it makes the old tax regime a complex system for taxpayers to choose ideal ones to claim deductions and exemptions.
What Is the New Tax Regime?
As mentioned at the beginning of this article, the Union Budget 2020 paved way for the introduction of the new income tax regime. The goal of the new regime is to simplify the tax return process for taxpayers by eliminating the various deductions and exemptions that are made available under the old regime. Under the new regime, taxpayers are only allowed to claim a standard deduction of Rs. 50,000 and deductions for contributions made towards the National Pension System (NPS) and health insurance premiums. This in turn helps taxpayers to have a smooth tax filing experience instead of getting bogged down by tax planning which often leads to dismay in their financial goals.
Read more about New Tax Regime
Advantages of Opting for the New Tax Regime
With the help of six tax slabs, the new tax regime possesses the most prominent feature that works in its favour which is lower tax rates for salaries up to Rs 15 Lakh. This in turn eliminates the need to maintain tax-saving instruments such as ELSS mutual funds, PPF, and tax-saving FDs for taxpayers when they choose to opt for the new tax regime, giving them more flexibility in managing their investments and finances. The new tax regime offers flexibility for people and allows them to explore and choose different investment options instead of getting clogged upon tax-saving options alone.
Limitations of Opting for the New Tax Regime
Despite its advantageous position in offering lower tax brackets, there are a few limitations to opting for the new tax regime. They are:
1. No Exemptions and Deductions:
Taxpayers cannot claim any popular deduction options like HRA, LTA, or 80C under the new tax regime. There are no exemption options either here.
2. Limited Investment Options:
The new tax regime completely disregards popular investment options like PPF, NSC, ELSS mutual funds, etc. which are commonly opted amongst the salaried class and catered to both their financial goals and tax planning.
Income Tax Slab Rates for New Vs Old Tax Regime
Old Tax Regime – The tax slabs for the financial year 2023-24 are as follows:
Up to Rs. 2.5 lakhs: Nil
Rs. 2.5 lakhs to Rs. 5 lakhs: 5%
Rs 5 lakhs to Rs 10 lakhs: 20%
Above Rs. 10 lakhs: 30%
In addition to the tax slabs, taxpayers are also required to pay a cess of 4% on their tax liability.
New Tax Regime – The tax slab structure under the new regime is as follows:
Up to Rs 3 lakhs: Nil
Rs 3 lakhs to Rs. 6 lakhs: 5% on income more than 3,00,000
Rs 6 lakhs to Rs. 9 lakhs: Rs 15000 + 10% on income more than 6,00,000
Rs 9 lakhs to Rs. 12 lakhs: Rs 45000 + 15% on income more than 9,00,000
Rs 12 lakhs to Rs. 15 lakhs: Rs 90,000 + 20% on income more than Rs 12,00,000
Above Rs 15 lakhs: Rs 1,50,000 + 30% on income more than Rs 15,00,000.
As with the old regime, taxpayers are required to pay a cess of 4% on their tax liability.
Old Vs New Tax Regime: Which Is Better?
The key difference between the old and new income tax regimes is the deductions and exemptions available to taxpayers. Taxpayers are allowed to claim various deductions and exemptions, which can significantly reduce their tax liability under the old regime whereas, under the new regime, these deductions and exemptions are not available, and taxpayers are only allowed to claim a standard deduction of Rs. 50,000 and deductions for NPS and health insurance premiums.
Illustration on Income Tax Calculation (Old vs New Tax Regime)
|Old Tax Regime (In Rs)
|New Tax Regime (In Rs)
|Annual HRA Received
|Annual House Rent Paid
|Annual HRA exempted from tax
|Health Insurance Premium for Parents
|Health Insurance Premium for Self
|Total: Deduction and Exemptions
|Net Taxable Income
Note: All the amounts in the table are annual figures. The amounts in brackets represent an eligible deduction.
Total Tax Payable as per Old Regime
The total tax liability is Rs 1,35,200.
Total Tax Payable as per New Regime (FY 23-24 & AY 24-25)
The total tax liability is Rs 1,52,800.
How much income is tax free in India?
Under both tax regimes, individuals below 60 years of age are not required to pay tax up to the income limit of Rs 2.5 Lakhs.
Should I file my ITR if my annual income is below ₹ 2.5 lakh of the basic exemption limit?
Yes. It is always advisable to file your ITR as it creates a repository and helps your case when you are taking loans from banks.
When is the due date for filing an ITR for individual taxpayers?
For individual taxpayers, the due date is 31st July of the assessment year.
What is the time period considered for the purpose of levy of income tax?
In India, we tax for income earned in the previous fiscal year. The current previous year is from 1st April 2022 to 31st March 2023, i.e. FY 2022-23. The corresponding assessment year is 1st April 2023 to 31st March 2024, i.e. AY 2023-24. The deadline to file FY 2022 ITR would be 31st July 2023 unless extended by the authorities.