Understanding taxes can be confusing, especially when there are different rules for the old and new systems in India. The unveiling of the Budget 2023-24 in India has sparked a significant debate between the efficacy of the old tax regime and the promises of the new one. Understanding the implications, nuances, and potential advantages of each system is paramount for anyone seeking to optimise their financial planning. This article of our personal finance series is here to help you make sense of it all. We'll explain the differences between the old and new regimes and make it easier for you to decide which one works best for you.
The New Tax Regime:
A fresh tax system was introduced during the Budget 2020, which made changes to the tax brackets and provided discounted tax rates for taxpayers. However, those who choose this new system cannot claim various exemptions and deductions, such as HRA, LTA, 80C, 80D, and others. Due to this, not many people opted for the new tax system. To encourage more people to adopt the new system, the government introduced 5 major changes during the Budget 2023.
These changes are as follows:
Increased Tax Rebate Limit: The full tax rebate is now applicable for an income up to ₹7 lakhs, as opposed to ₹5 lakhs under the old tax system. This implies that individuals with an income of up to ₹7 lakhs won't have to pay any tax under the new tax system.
Simplified Tax Slabs: The tax exemption limit has been raised to ₹3 lakhs, and the new tax slabs are now more streamlined:
Total Income | Rate of Tax |
up to ₹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% |
₹15,00,001 and above | 30% |
Standard Deduction and Family Pension Deduction: The standard deduction of ₹50,000, previously only available in the old system, has been extended to the new tax system. This further pushes the non-taxable income to ₹7.5 lakhs.
Higher Leave Encashment Exemption: Non-government employees now have an increased exemption limit for leave encashment, from ₹3 lakhs to ₹25 lakhs, representing an eightfold increase.Additionally, individuals receiving family pension can claim a deduction of ₹15,000 or 1/3rd of the pension, whichever is lower.
Reduced Surcharge for High Net Worth Individuals: The surcharge rate on income exceeding ₹5 crores has been decreased from 37% to 25%, leading to a decline in the effective tax rate from 42.74% to 39%.
Moreover, starting from the fiscal year 2023-24, the new income tax system will be set as the default option. If individuals prefer the old system, they must submit a form during the return filing. They will have the flexibility to switch between the two systems annually.
Previous Tax System:
Within this system, there are more than 70 exemptions and deductions available, such as HRA and LTA, which can lower your taxable income and reduce your tax payments. One of the most popular and generous deductions is Section 80C, which allows for a reduction of taxable income by up to Rs. 1.5 lakh.
Comparison Between Old and New Tax Systems: Which is Better?
The decision to transition to the new system or remain under the old tax regime, and determining which regime is more advantageous for you, should be based on the tax-saving deductions and exemptions you qualify for in the old tax system.
Salary Wise Analysis of Old vs New Tax Regime:
Salary Level | Which Tax Regime? |
Rs 7 Lakhs | New structure because exemption upto Rs. 7,00,000 and additional deduction of Rs 50,000 |
Rs 10 Lakhs | Old structure if tax-saving investments > Rs. 2,62,500 New structure if tax-saving investments < Rs. 2,62,500 |
Rs 12 Lakhs | Old structure if tax-saving investments > Rs. 3,00,000 New Structure if tax-saving investments < Rs. 3,00,000 |
Rs 15 Lakhs | Old structure: if tax-saving investments > Rs. 3,58,000 New structure: if tax-saving investments < Rs 3,58,000 |
Rs 20 Lakhs | Old structure: if tax-saving investments > Rs. 3,75,000 New structure: if tax-saving investments < Rs 3,75,000 |
Rs 25 Lakhs | Old structure: if tax-saving investments > Rs. 3,75,000 New structure: if tax-saving investments < Rs 3,75,000 |
Rs 30 Lakhs | New structure if tax deductions are less than Rs 3,75,000. Otherwise, they should opt for the old tax structure. |
Rs 50 Lakhs | Old structure if their total tax-saving deductions amount to Rs 3,75,000 or more. Otherwise, they should opt for the new tax structure. |
Which tax structure is more advantageous for an income of 7 lakhs?
For individuals earning Rs 7 lakhs, the new tax structure will prove to be beneficial because of the new threshold increase from Rs 5 lakhs to Rs 7 lakhs. Further, you get a deduction of Rs 50,000 making the cumulative limit a total of Rs 7.5 lakhs. If however, your salary breaches this ceiling then it would be prudent to go for the old tax regime. You also have the option to switch annually between the two tax structures.
Which tax structure is more advantageous for a 10 lakh salary?
For those with a salary of Rs 10 lakhs, the previous tax structure will be favourable only if they have made tax-saving investments (excluding standard deductions) of more than Rs 2,62,500. If these deductions fall short of Rs 2,62,500, then the new structure will be more advantageous.
Which tax structure is more advantageous for a 12 lakh salary?
For those earning 12 lakhs, the old tax structure is preferable if they have invested over Rs 3,00,000 in tax-saving schemes. If their investments or expenses are less than Rs 3,00,000, then the new structure will be more beneficial.
Which tax structure is more advantageous for a 15 lakh salary?
The preferable structure depends on the amount of tax-saving investments made:
Old structure: if tax-saving investments > Rs. 3,58,000
New structure: if tax-saving investments < Rs 3,58,000
Which tax structure is more advantageous for a 20 lakh salary?
The best-suited structure is determined by the eligible tax deductions:
Old structure: if tax-saving investments > Rs. 3,75,000
New structure: if tax-saving investments < Rs 3,75,000
Which tax structure is more advantageous for a 25 lakh salary?
The preferable structure is based on the eligible tax deductions:
Old structure: if tax-saving investments > Rs. 3,75,000
New structure: if tax-saving investments < Rs 3,75,000
Which tax structure is more advantageous for a 30 lakh salary?
For those earning 30 lakhs, the new structure will be beneficial if their tax deductions are less than Rs 3,75,000. Otherwise, they should opt for the old tax structure.
Which tax structure is more advantageous for a 50 lakh salary?
For individuals earning 50 lakhs, the old structure will be beneficial if their total tax-saving deductions amount to Rs 3,75,000 or more. Otherwise, they should opt for the new tax structure.
The Gist
How to select between the old and new tax systems?
The new income tax system appears to be designed with certain considerations to accommodate different categories of taxpayers, especially those who prefer simpler tax preparations and those who may not benefit from specific exemptions and deductions. However, it's important to carefully evaluate the implications of these changes for different groups of taxpayers.
For non-salaried taxpayers, like consultants, who are ineligible for certain exemptions and deductions, the new system could provide a more straightforward approach to tax filing. Similarly, older individuals without pensions and senior citizens relying on interest income might find different advantages and disadvantages under the old and new tax structures.
The contrasting features of the old and new tax systems highlight the need for a tailored approach based on individual circumstances. The previous system encourages savings, while the new system provides benefits for certain income groups with fewer deductions and exemptions. The simplicity of the new tax system is a notable advantage, as it minimizes the likelihood of tax evasion and fraud.
It is crucial for individuals to seek guidance from tax professionals, such as Chartered Accountants, to make informed decisions about their tax planning. Optimizing available deductions and exemptions can significantly impact one's tax liabilities. Additionally, consulting with a Registered Investment Advisor can help individuals strike a balance between tax-saving investments and other investment options that align with their long-term financial goals and risk tolerance.
Given the complexity and individual nuances of the tax system, seeking professional advice can ensure that taxpayers make the most of the benefits available to them while also making sound financial decisions for the future.
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