Old vs New Tax Regime – Which One is More Beneficial in 2023?
The government introduced a new tax regime in FY 20-21 in addition to the existing regime and revised some of its provisions in the Union Budget 2023. The basic objective of the new tax regime is to provide an option to taxpayers to reduce their tax liability by foregoing a majority of tax exemptions at their disposal. However, for many individuals, the old tax regime could be more beneficial. If you want to know which tax regime you should opt for, you must know the key points of the old vs new tax regime.
This article lists out the key differences between the old and new tax regimes, compares the pros and cons, shows how tax is calculated according to the two tax regimes, and finally, helps you choose the one that’s most suitable for you. Read on!
Old vs New Tax Regime – A Brief Comparison
Under the old regime, taxpayers falling under the income bracket of ₹5 lakh to ₹10 lakh had to pay 20% tax. As per the new regime to be effective from April 1, 2023, the income of ₹5 lakh to ₹6 lakh will be taxed at 5%, ₹6 lakh to ₹9 lakh at 10%, and ₹9 lakh to ₹10 lakh at 15%. Plus, the standard deduction of ₹50,000 available only under the old regime has now been extended to the new regime. Lastly, you will not have to pay any taxes if your income is up to ₹7.5 lakh under the new regime due to the standard deduction and rebate under Section 87A of the I-T Act.
Here’s a table showing the tax rates under the old regime, the new regime (valid until March 31, 2023), and the proposed new regime (valid from April 1, 2023):
| Income Tax Slab | New Regime(until March 31, 2023) | New Regime (from April 1, 2023) | Old Regime |
| Up to ₹2.5 lakh | Nil | Nil | Nil |
| ₹2.5 lakh to ₹3 lakh | 5% | Nil | 5% |
| ₹3 lakh to ₹5 lakh | 5% | 5% | 5% |
| ₹5 lakh to ₹6 lakh | 10% | 5% | 20% |
| ₹6 lakh to ₹7.5 lakh | 10% | 10% | 20% |
| ₹7.5 lakh to ₹9 lakh | 15% | 10% | 20% |
| ₹9 lakh to ₹10 lakh | 15% | 15% | 20% |
| ₹10 lakh to ₹12 lakh | 20% | 15% | 30% |
| ₹12 lakh to ₹12.5 lakh | 20% | 20% | 30% |
| ₹12.5 lakh to ₹15 lakh | 25% | 20% | 30% |
| More than ₹15 lakh | 30% | 30% | 30% |
This table shows the applicable tax rates for individuals aged 60 years or less and HUFs (Hindu Undivided Families). For senior citizens falling between the age group of 60 and 80 years, there is a basic tax exemption of ₹3 lakh. Moreover, for super senior citizens over the age of 80, the basic exemption is ₹5 lakh.
Therefore, the applicable tax rate for senior citizens and super senior citizens is nil for annual incomes of ₹3 lakh and ₹5 lakh, respectively.
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Difference Between Old and New Tax Regime
1. Lower Tax Rates with More Slabs Under the New Regime
The finance minister, in her Union Budget 2023 speech, announced to increase the number of tax slabs to six under the new regime while reducing the applicable tax rates to 0%, 5%, 10%, 15%, 20% and 30% on income up to ₹15 lakh. For those earning more than ₹15 lakh, the applicable tax slab rate would remain unchanged at 30% under both the tax regimes.
2. No Tax Exemptions Under the New Regime
The new tax regime doesn’t offer any tax deduction benefits or exemptions like the old regime, except the standard deduction of ₹50,000 that has now been extended to the new regime. That means tax exemptions up to ₹1.5 lakh under Section 80C, up to ₹2 lakh on home loan interest component under Section 24B, up to ₹1 lakh under Section 80D, etc. are not available under the new regime.
3. No Tax if Your Income is Less than ₹7.5 lakh Under the New Regime
While you don’t have to pay any tax if your income is below ₹5 lakh under the old regime, your tax obligation will be nil if your income is less than ₹7.5 lakh under the new regime, inclusive of the newly-introduced standard deduction of ₹50,000.
Deductions and Exemptions Under Old Tax Regime
- Travel allowance and house rent allowance
- Deductions on interest from deposits on savings accounts as under Section 80TTA/TTB
- Professional tax and entertainment allowance deduction for government employees
- Exemptions under Section 10 (14)
- Tax deduction on the interest component of home loan for vacant or self-occupied property, as mentioned under Section 24
- Tax deduction of ₹15,000 for family pension, as under Section 57 Clause (iia)
- Deduction of tax under the Income Tax Act’s Chapter VI-A, including Section 80C, 80D, and 80G, etc.
Advantages of Opting for Old Tax Regime
- There are almost 70 tax deduction benefits and rebates available under the old tax regime
- A few of these tax exemptions are available on life insurance and health insurance premiums that incentivise insurance purchases and maintenance helping taxpayers to secure their financial future and that of their dependents
- Multiple tax exemptions are also available on eligible investment instruments like equity linked savings schemes, Public Provident Fund, National Pension System, Tax-saver FDs, etc. up to ₹1.5 lakh under Section 80C of the I-T Act that could help taxpayers beat inflation and achieve their long-term financial goals
- The final tax obligation under the old regime might be lower than the new regime for certain taxpayers who usually maximise the tax deduction benefits
Limitations of Opting for Old Tax Regime
- The tax slab rates are higher under the old regime on multiple tax brackets up to ₹15 lakh
- Higher tax outgo under the old regime could translate to lower disposable income
- Most of the investments qualifying for tax exemptions under the old regime come with long lock-in periods
Deductions and Exemptions Under New Tax Regime
- Standard deduction of ₹50,000 for salaried individuals and pensioners who earn their income under the head ‘Income from Salaries’
- Standard deduction of ₹15,000 for family pensioners who earn their income under the head ‘Income from Other Sources’
- Tax deduction benefit on employer’s NPS contribution to the employee’s NPS account under Section 80CCD (2). The maximum benefit should not exceed 10% of basic salary plus dearness allowance for private sector employees, and 14% for government employees
- Any amount paid towards Agniveer Corpus Fund would enjoy tax deduction benefits under the newly-launched Section 80CCH of the Income Tax Act
Advantages of Opting New Tax Regime
- Lower tax slab rates under the new regime could reduce the tax outgo for certain taxpayers
- The new regime’s lower tax outgo could mean higher disposable income
- The new regime significantly reduces tax compliance
- No income tax for eligible taxpayers with income up to ₹7.5 lakh
- The new regime gives taxpayers more freedom to invest and insure in line with their returns expectation, risk tolerance and liquidity requirements without bothering about tax-saving goals
Limitations of Opting for New Tax Regime
- A majority of tax exemptions are not available under the new regime which might discourage certain taxpayers from investing and insuring
- The new tax regime could be less flexible for business people
- The final tax obligation could be higher for certain taxpayers who maximise the tax exemptions under the old regime
- No tax rate concessions on income above ₹15 lakh under the new regime
Old Regime vs New Regime – Which One Should You Opt?
There’s no one-size fits all answer to this question. The basic difference between the two regimes is one has a lower rate of taxes while the other provides major exemptions and deductions which significantly reduce the taxable income. So, it is best to calculate tax in both regimes and see which regime provides better benefits.
Before finalising your decision, ensure you compare your tax obligations under both the systems using an online calculator, like the Navi Income Tax Calculator.
Ensure you enter all your existing and planned tax-saving measures, like deductions and exemptions, and also your gross annual income, income from other sources, rental income, HRA, etc. to get accurate results. Once you have both the results, you might want to go for a regime where the tax obligation would be lower for you.
Final Word
The new tax regime, now even more attractive with the introduction of the ₹50,000 standard deductions, could translate to lower tax outgo leading to more disposable income. So, even if you choose to adopt the new regime after carefully comparing your tax obligations under both the regimes, ensure you don’t ignore adequate investments and insurance just because there won’t be any tax incentive to do so. On the contrary, the new tax regime should give you more flexibility to invest and insure freely as per your goals without thinking about tax-saving goals.
That said, if you’re looking to save up to ₹46,800 in taxes under the old regime while investing in India’s top 50 companies, you can consider investing in Navi Mutual Fund’s ELSS Tax Saver Nifty 50 Index Fund . Just download the Navi app, and start investing with as little as ₹500.
FAQs
The applicable deductions and income quantum differ from individual to individual. So, taxpayers should calculate their liability under both these tax regimes by themselves. Upon a thorough comparison, they might arrive at a regime that best suits them.
As per protocol, you need to inform your employer about the tax regime you decide to go with at the beginning of the financial year. However, if you wish to switch to the old tax regime in the middle of a financial year, you can do so while filing your income tax returns. Note that you cannot shift to another tax regime before filing ITR.
Yes, as per the Finance Bill of 2020, pensioners and individuals with no business income are eligible to switch between tax regimes every assessment year, depending upon their financial condition.
However, individuals who have business income, including freelancers, have the option to opt for the old regime only once in their life if they had chosen the new tax regime during the current assessment year.
House Rent Allowance (HRA) is a part of your salary. However, it is not fully taxable as your salary. After certain considerations, HRA is exempted from tax under Section 10 (13A) of the Income Tax Act. However, if you choose the new tax regime, you will not be able to claim an exemption of tax on HRA.
Leave Travel Allowance (LTA) is provided to an employee by the employer granting leave to employees while bearing their travel expenses. Employees can get an LTA tax exemption under Section 10 (5) of the Income Tax Act. However, under the new tax regime, this exemption is waived.
Yes, you need to file returns even if your income is below the taxable limit and your tax liability is zero.
The Central Government decides the tax slab rate and announces it in the annual budget.
Disclaimer
This article is solely for educational purposes. Navi doesn't take any responsibility for the information or claims made in the blog.
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