Answer By law4u team
In India, taxpayers have the option to choose between two tax regimes—the old tax regime and the new tax regime. The old tax regime offers several tax deductions and exemptions, whereas the new tax regime provides lower tax rates but removes most of these benefits. The choice between the two depends on the individual’s income level and the available deductions, and it requires careful evaluation to maximize tax savings.
Key Differences Between the Old and New Tax Regimes:
Tax Slabs:
Old Tax Regime:
The old tax regime has higher tax rates but offers a wide range of deductions and exemptions that can lower taxable income. The tax slabs for individual taxpayers (below 60 years of age) are:
- Up to ₹2.5 lakh: No tax.
- ₹2.5 lakh to ₹5 lakh: 5% of income exceeding ₹2.5 lakh.
- ₹5 lakh to ₹10 lakh: 20% of income exceeding ₹5 lakh + ₹12,500.
- Above ₹10 lakh: 30% of income exceeding ₹10 lakh + ₹1,12,500.
New Tax Regime:
The new tax regime provides lower tax rates but eliminates most exemptions and deductions. The tax slabs for individual taxpayers (below 60 years of age) under the new tax regime are:
- Up to ₹2.5 lakh: No tax.
- ₹2.5 lakh to ₹5 lakh: 5% of income exceeding ₹2.5 lakh.
- ₹5 lakh to ₹7.5 lakh: 10% of income exceeding ₹5 lakh.
- ₹7.5 lakh to ₹10 lakh: 15% of income exceeding ₹7.5 lakh.
- ₹10 lakh to ₹12.5 lakh: 20% of income exceeding ₹10 lakh.
- ₹12.5 lakh to ₹15 lakh: 25% of income exceeding ₹12.5 lakh.
- Above ₹15 lakh: 30% of income exceeding ₹15 lakh.
Deductions and Exemptions:
Old Tax Regime:
The old tax regime allows taxpayers to claim various deductions and exemptions, which can reduce taxable income. Some of the key deductions are:
- Section 80C: Deduction up to ₹1.5 lakh on investments in PPF, LIC premiums, EPF, NSC, etc.
- Section 80D: Deduction for health insurance premiums.
- Section 24(b): Deduction of up to ₹2 lakh on home loan interest.
- Standard Deduction: ₹50,000 for salaried and pensioned individuals.
- House Rent Allowance (HRA) and Leave Travel Allowance (LTA) are also available in the old regime.
New Tax Regime:
The new tax regime eliminates most of the deductions and exemptions, including:
- Section 80C deductions.
- Standard Deduction.
- HRA and LTA exemptions.
- Section 80D, Section 24(b), and other deductions.
However, a taxpayer can still claim a rebate under Section 87A if their taxable income is up to ₹5 lakh (for both old and new tax regimes).
Tax Rates:
Old Tax Regime:
The old tax regime has higher tax rates compared to the new regime but allows taxpayers to save taxes through various exemptions and deductions.
New Tax Regime:
The new tax regime offers lower tax rates but removes the ability to claim exemptions and deductions, which makes it beneficial for taxpayers who do not have many tax-saving investments or expenses.
Which Tax Regime Should You Choose?:
Old Tax Regime:
The old tax regime is beneficial for taxpayers who have a lot of deductions and exemptions, such as those with large home loan interest payments, insurance premiums, or investments under Section 80C. It allows taxpayers to reduce their taxable income significantly.
New Tax Regime:
The new tax regime is suited for taxpayers who do not have many deductions or exemptions and prefer the simplicity of lower tax rates without the need for managing investments or keeping track of expenses. It is more beneficial for individuals who prefer lower compliance or have fewer deductions.
Flexibility in Switching:
Individual and Hindu Undivided Families (HUF) can switch between the old and new tax regimes every year while filing their returns. This allows taxpayers to choose the tax regime that benefits them the most in any given year, based on their income and eligible deductions.
Example:
Let’s consider two individuals with a gross income of ₹10,00,000:
Old Tax Regime:
They claim deductions under Section 80C (₹1.5 lakh) and Section 80D (₹25,000 for health insurance), resulting in a total deduction of ₹1.75 lakh.
Taxable Income = ₹10,00,000 - ₹1,75,000 = ₹8,25,000.
Tax Calculation:
- ₹2.5 lakh to ₹5 lakh: 5% of ₹2.5 lakh = ₹12,500.
- ₹5 lakh to ₹8.25 lakh: 20% of ₹3.25 lakh = ₹65,000.
Total Tax = ₹12,500 + ₹65,000 = ₹77,500.
Plus 4% Cess = ₹3,100.
Total Tax Payable = ₹80,600.
New Tax Regime:
The taxable income remains ₹10,00,000, as there are no deductions.
Tax Calculation:
- ₹2.5 lakh to ₹5 lakh: 5% of ₹2.5 lakh = ₹12,500.
- ₹5 lakh to ₹7.5 lakh: 10% of ₹2.5 lakh = ₹25,000.
- ₹7.5 lakh to ₹10 lakh: 15% of ₹2.5 lakh = ₹37,500.
Total Tax = ₹12,500 + ₹25,000 + ₹37,500 = ₹75,000.
Plus 4% Cess = ₹3,000.
Total Tax Payable = ₹78,000.
