How should I decide which is a better tax regime for me—old or new tax regime? What deductions will I get in old regime and how can I reduce my tax burden if I choose new tax regime?
Understanding the comparison of the old vs new tax regime in the FY 2023-24 (AY 2024-25) is crucial for you to get the answers of these questions and make informed choices for your income tax filing.
Budget 2023 came up with a lot of changes, with the main focus on making the new tax regime more attractive. The motive behind these changes was to encourage more and more taxpayers to adopt the new tax regime.
Let us look at both regimes and calculate and compare old and new tax regimes, and which regime will be the most beneficial to opt for in 2024.
Budget 2024 Updates
In the 2024 interim budget, no changes were made to taxation for FY 2024-25. Finance Minister Nirmala Sitharaman retained existing tax rates for direct and indirect taxes, i.e., the changes announced for FY 2023-24 will be continued. A full budget is anticipated in July after the new government is formed post Lok Sabha elections.
New Tax Regime
The new tax regime was introduced in budget 2020 with concessional tax rates. However, the taxpayers who opted for the new tax regime could not claim major deductions like HRA, LTA, 80C, and many others. This leads to a smaller number of taxpayers opting for 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.
Leave encashment exemption:- The limit of Rs. 3 lakh for tax exemption on leave encashment on non-government salaried employees has been raised to Rs. 25 lakh.
Insurance plans:- As per the announcement in the Budget 2023-24, income from traditional insurance policies where the premium is more than Rs 5 lakh will not be tax-free.
Tax Slabs:- The new tax regime has reduced the income tax slabs from 6 to 5. The revised tax structure as per the new tax regime is:-
(Note:- The changes introduced in budget 2023 will remain the same even for FY 2024-2025 since no changes were made in the Interim Budget 2024)
Income Tax Slab Rate for New Tax Regime
Range of income | Tax Rate |
Upto 3,00,000 | Nil |
3,00,001-6,00,000 | 5% |
6,00,001-9,00,000 | 10% |
9,00,001-12,00,000 | 15% |
12,00,001-15,00,000 | 20% |
Above 15,00,001 | 30% |
Old Tax Regime
The Old Tax Regime was introduced way before the new tax regime. Old Tax regime offers more than 70 deductions and exemptions to claims like Section 80C, HRA, LTA, and more.
You can read more about income tax slabs here.
The comparison for the tax rates is as follows:
Income Tax Slab | Old Tax Regime | New tax Regime (Before budget 2023) | New Tax Regime (After Budget 2023) |
₹0 - ₹2,50,000 | - | - | - |
₹2,50,001 - ₹3,00,000 | 5% | 5% | - |
₹3,00,001 - ₹5,00,000 | 5% | 5% | 5% |
₹5,00,001 - ₹6,00,000 | 20% | 10% | 5% |
₹6,00,001 - ₹7,50,000 | 20% | 10% | 10% |
₹7,50,001 - ₹9,00,000 | 20% | 15% | 10% |
₹9,00,001 - ₹10,00,000 | 20% | 15% | 15% |
₹10,00,001 - ₹12,00,000 | 30% | 20% | 15% |
₹12,00,001 - ₹12,50,000 | 30% | 20% | 20% |
₹12,50,001 - ₹15,00,000 | 30% | 25% | 20% |
More than ₹15,00,000 | 30% | 30% | 30% |
How to Choose Between Old and New Tax Regime?
When the employer asks for the investment declaration to deduct taxes on salary income, the individual must analyse the pros and cons of both the tax regimes before choosing one and informing the employer about it in April, otherwise, this may lead to a higher tax deduction from your salary income.
To decide between the two tax regimes, it's crucial to assess the tax exemptions and deductions available under the old tax regime. After determining the net taxable income under the old regime by accounting for all eligible deductions and exemptions, one can calculate the resulting tax liability.
Next, this tax liability under the old tax regime should be compared with the tax liability under the new tax regime. Opting for the regime with the lower tax liability is typically the preferred choice. It's important to inform the employer of this decision so that they can adjust the TDS (Tax Deducted at Source) from the salary accordingly. This ensures that the correct amount of tax is deducted each month, aligning with the chosen tax regime and minimizing the chances of any tax dues or refunds at the end of the financial year.
Which Tax Regime is Better? New Regime vs Old Regime
This decision to switch between new or old tax regime depends on several factors like:-
Investment Goals- It is always advised to evaluate investment goals before selecting which tax regime to choose. The new tax regime suits you if you are flexible with your investments and looking forward to not investing in tax-saving instruments. However, If you have investment goals such as retirement savings or building a corpus for a long-term goal, the old tax regime may be more beneficial as it offers deductions for contributions to various investment instruments.
Simplicity- The new tax regime documentation process is simple, it eliminates the need to calculate and claim deductions and exemptions, which helps taxpayers to file the ITR quickly.
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. Similarly, an individual with INR 15 lakh annual income will have to pay a tax of INR 1.5 lakh under the new tax rates introduced under budget 2023 for the new tax regime, which is a reduction from the earlier tax liability of INR 1.87 lakh calculated as per new tax regime rates before budget 2023. The reduction in tax liability is due to the lower tax rates under the new tax regime, which has revised tax slabs and rates to relieve taxpayers.
Deductions and exemptions- Under the old tax regime, you can avail of a deduction of Rs 1.5 lakh under Section 80C and Rs 2 lakh under Section 24(b) on the interest amount for self-occupied property. This means a straight deduction of Rs. 3.5 lakh can be availed under the old tax regime, while the new tax regime does not offer such deductions and exemptions.
Particulars | Old Regime | New Regime |
Gross Salary | 700,000 | 700,000 |
Less: Standard deduction | Yes | Yes |
Net Salary | ||
Less: Deductions / Exemptions | ||
80C Deductions | Yes | No |
Interest on Home Loan | Yes | No |
80D Deductions/ All other | Yes | No |
Employee's Contribution under NPS | Yes | No |
Any Other deduction | Yes | No |
HRA / LTA / Other exemptions | Yes | No |
Total of all deductions/ exemptions | Yes | No |
Taxable Income | 0 | 0 |
Breakeven Threshold to Decide which Regime to Choose: New vs Old Tax Regime
Budget 2023 proposes an increment in rebate under Section 87A for taxpayers opting for a new tax regime as per which taxpayers who earlier had to pay zero income tax on income up to Rs 5 lakh will now pay zero tax for income up to Rs 7 lakh.
Also, has extended a standard deduction of Rs. 50,000 for salaried individuals under the new tax regime.
As a result of deduction and rebate along with the tweak in income tax slab, salaried individuals will have to pay zero tax liability up to the income of Rs 7.5 lakh annually. Thus going for a new tax regime is very clear here.
For earnings above 7.5 lakh, we have calculated a breakeven point for various income levels. The break-even point is the amount where there will be no difference in tax liability between both regimes.
If your total eligible deductions and exemptions in the old regime are higher than the breakeven threshold for your income level, stick with the old regime. If the breakeven threshold is higher than your total eligible deductions and exemptions, the new regime may be more beneficial for you.
If you have salary income:
Income Level | Break Even Point (BEP) of Deduction |
up to 5 lac | Nil |
6 lac | 1,00,000 |
7 lac | 2,00,000 |
8 lac | 2,12,500 |
9 lac | 2,62,500 |
10 lac | 3,00,000 |
11 lac | 3,25,000 |
12 lac | 3,50,000 |
13 lac | 3,62,500 |
14 lac | 3,75,000 |
15 lac | 4,08,333 |
15.5 lac up to 5 crore | 4,25,000 |
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