Explained : New tax regime vs old tax regime, what will work for you?

Union Finance Minister Nirmala Sitharaman in her 2023 budget speech made some key announcements around personal tax. She spoke of tax Regimes, the hike in rebate limit, and announced the new tax slabs under the New Tax Regime which she said would be considered as default. It becomes imperative for taxpayers to know which regime is more suitable for them. Read on...

Hyderabad:Personal tax was the spotlight in the Budget 2023-24 speech by Finance Minister Nirmala Sitharaman who noted that it was something everyone was waiting for and that she had some major announcements to make in this regard.

The Finance Minister proposed to reduce the number of tax slabs from 6 to 5 and extend standard deduction of Rs 50,000 to the New Tax Regime (NTR). Previously, the benefit of standard deduction was available only for those opting for the Old Tax Regime (OTR). But the proposal to increase the rebate limit for income up to Rs 7 lakh exclusively for NTR led to the confusion of which regime is more suitable for an individual taxpayer.

The new tax slabs under NTR are 0-3 lakh (no tax), 3-6 lakh (5% tax), 6-9 lakh (10%), 9-12 lakh (15%), 12-15 lakh (20%), and above 15 lakh (30%)

Other than Standard Deduction of Rs 50,000, the NTR does not allow any other exemptions and deductions. Also note that under both the regimes, standard deduction of Rs 50,000 is applicable only in case of income from salary and not from any other sources.

Under Old Tax Regime an individual can avail several deductions and exemptions as per his or her eligibility and saving needs as follows:

Standard Deduction (Rs 50,000); HRA exemption depending on the salary structure and actual rent paid ; Interest paid on Housing Loan u/s 24(b) up to Rs 2 lakh ; General tax saving investment deduction under chapter VI-A ; 80C – 1.5 Lakhs – Insurance, Tuition Fees, PF, PPF, Tax Saving FDs, ELSS etc. ; 80D – 50,000 - Medical Insurance premium (Self + Parents) ; 80E – Interest on Education Loan ; 80CCD(1B) – 50,000 – NPS ; 80DD – 75,000/-Medical Treatment of Disabled Dependents ; 80DDB – 1,00,000/-medical Treatment of Specified Diseases ; 80EE, 80EEA – Additional deduction on Interest paid on Housing Loan in excess of Rs. 2 Lakh ; 80G – Donations ; 80GGC – Actual Political Donations ; 80TTA – 10,000 – Interest on Savings bank a/c ; 80TTB – 50,000 – Interest on Deposits (For Senior Citizens only)

Budget 2023 Old vs New tax regime

The deductions/exemptions are availed as per an individual’s savings requirements and actual expenditure incurred. Let’s do a comparative analysis of tax computation of an individual under both regimes for different salaries with an assumption that he is eligible for a deduction under various provisions of IT Act.

In the case of the Old Tax Regime, salary income up to Rs. 5.5 Lakhs and under New Tax Regime salary income up to Rs 7.5 lakh doesn’t attract any tax liability due to the provision of rebate and standard deduction.

In case of income upto Rs 7.5 lakh, a person should opt for NTR as his tax liability will remain NIL even without any savings. Under OTR, he needs to either pay income tax of Rs 54,600 or show savings of Rs 2 lakh under various provisions, as per eligibility, to ensure zero tax pay-out.

In case of salary income of Rs 10 lakh, Income Tax in New Regime is Rs 54,600. A person with this income will have the same tax liability under OTR if he is eligible for a deduction of Rs 2.5 lakh. If the taxpayer opts for OTR and saves more than 2.5 lakhs then his tax liability will reduce below 54,600.

Similarly, if a person’s salary is Rs 15 lakh and he is eligible for deductions of Rs 3,58,400, his tax liability will be the same in both the regimes i.e., Rs 1,45,600. But if he is able to save more than the threshold limit of Rs 3,58,400, it is advisable to opt for OTR and reduce his tax liability to below Rs 1,45,600 which will depend on his actual deduction amount.

The following chart shows the threshold limit of deduction, for various salary incomes, which will help a taxpayer to decide which tax regime is suitable for him. If his total deduction is above the threshold amount, he should opt for the OTR otherwise it is beneficial to choose the NTR.

New tax regime vs old tax regime