Taxes are unavoidable, but it would help if the tax system is simple enough. Thankfully, there are two different tax regimes available to taxpayers under the Indian income tax system: the old tax system and the new tax regime. The old tax regime has many deductions and exemptions available to help reduce your tax liability. These include exemptions under 80C such as insurance premiums and PPF as well as exemptions such as HRA and LTA. It would be useful to understand the difference between old and new tax regime to help you decide which one would work best for you.
On the other hand, the new tax regime introduced in Budget 2020 introduced a simplified tax structure. It provided for reduced tax rates, unlike the complex taxation structure of the past. It simplifies tax computations and lowers tax, but eliminates most of the deductions and exemptions available to tax payers. It is therefore important for tax payers to understand the differences between old and new regime for effective tax planning and to boost savings. Every regime offers benefits, and the best one to choose will depend on your personal objectives and financial situation. Let’s us understand the differences between the two in detail.
New tax regime
Reduced tax rate is a key feature of the new tax regime. Furthermore, since fewer exemptions and deductions are available, filing taxes is made easier as less paperwork is needed.
Additionally, those who were unable to invest in specific products for personal or financial reasons now have more discretionary money, thanks to the lower tax rate. Thus, taxpayers get the flexibility to choose how they want to invest instead of being forced to invest only in specific schemes under the old tax regime.
Increased tax rebate limit
The higher tax rebate cap is among the new tax regime’s noteworthy features. By increasing the taxable income limit, the tax reform seeks to give them further relief. Taxpayers who have income below Rs. 7 lakhs will not have to pay any tax if they opt for the new tax regime. Middle-income people will be able to retain more of their hard-earned money, thanks to this reform.
Simplified tax slabs
The new tax regime’s simplified tax slabs make it easier for people to understand their tax outgo better. The following are the new tax regime slabs.
| Total Income | Tax rate |
| 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 new tax plan has retained the Rs. 50,000 standard deduction, which was only available under the old tax regime. When paired with the rebate, this amounts to Rs. 7.5 lakhs in tax-free income. For those who get a family pension, there is a deduction of ₹15,000 or one-third of the pension amount, whichever is smaller.
Also, the rate of surcharge on income above Rs.5 crores has been lowered from 37% to 25%. Their effective tax rate has been adjusted from 42.74% to 39%. The exemption cap for non-government workers has increased eightfold, from 3 lakhs to 25 lakhs.
Old tax regime
The old tax regime, which still remains an option, allows taxpayers to reduce their taxable amount with the help of several exemptions and deductions. This includes deductions that are made every month for the salaried workers. Section 80C deductions include premiums paid for life insurance policies, PPF and EPF, exclusions for leave travel allowance (LTA) and home rent allowance (HRA). This system incentivizes investments and savings by offering tax breaks for specific expenses.
Under this method, taxpayers may also deduct medical costs and home loan interest. The old tax regime has several tax-saving options, but can often confuse you with the wide variety of choices. The method of taxation employed by the new and current tax regimes differs from each another. The difference between the old and new tax regime is in the mode of tax calculation and the exemptions available.
List of exemptions and deductions in old tax regime slabs
- Old tax regime allows taxpayers to save on taxes by availing numerous exemptions and deductions. We have listed the significant exclusions and deductions.
- Section 80C: This entitles an annual deduction of up to ₹1. 5 lakhs for investments made in tax saving fixed deposits, EPF, NSC, PPF, and life insurance premiums.
- Section 80D: Individuals are allowed to deduct expenses incurred for health insurance premiums and medical treatment for self, parents or close relatives. A maximum of Rs. 25,000 could be claimed for the self, family, and parents besides an additional Rs. 25,000. The deduction cap rises to ₹50,000 if parents are senior citizens.
- Section 80 TTA: Permits a deduction of interest income from post office deposits and savings accounts of up to Rs. 10,000 in a year, applicable to all individuals and HUFs.
- House Rent Allowance (HRA): Permits a deduction equal to 50% of the base pay or the actual amount of HRA received.
- Leave Travel Allowance (LTA): Entails deductions of 40% of basic wages or the actual amount of LTA availed by the employee, whichever is lower.
- Standard Deduction: The self-employed and registered taxpayers are allowed a standard deduction of ₹50,000 in a financial year.
- Tax benefits on home loans: Under Section 24B of the Income Tax Act, you can claim exemption for interest paid on housing loan up to Rs. 2,00,000 in a year. Section 80C allows you to claim exemption on repayment of principal amount up to Rs. 1,50,000 in a year.
List of significant exemptions included in the new tax regime
Concessional tax rates with fewer exemptions and deductions were implemented under the new tax system. In Budget 2023, Section 115BAC underwent additional amendments. The revised regime became the default starting in FY 2023–2024. Taxpayers may still take advantage of several notable exemptions under the new system, though. Here are a few benefits available under the new tax regime:
- Standard deduction of Rs, 50,000 under Section 80TTB is available if you opt for the new tax regime.
- Contributions made to the NPS accounts of employees by the employer are exempt from taxes under the new tax regime.
Difference between old vs. new tax regime: Which one should you choose?
The new tax rules for adjusting to the new rates were made for individuals, companies and Hindu Undivided Families (HUF) in the Budget 2020-21.
Earlier, there was only one tax regime available. Under this system, taxpayers can lower their taxable income and hence lower their tax payment by availing one of the many deductions and exemptions available. This system allows for several deductions and exclusions, including 80C, HRA, and LTA.
Choosing between the old vs. new tax regime should be based on one’s tax planning approach and financial goals. An individual may benefit more under the previous tax system if they have many investments. However, the new tax regime could be helpful for people who don’t have many investments or find tax filing process laborious.
The difference between the old and new tax regime primarily lies in the extent of exemptions and deductions available. If you are not bothered about tax exemptions and are open to changes in your portfolio, the new tax regime could be the one for you. However, the previous tax system may be beneficial if you have investment goals such as retirement planning or building up funds for a specific purpose as it provides various tax exemptions.
Old vs. new regime example
We can understand the old vs. new regime better with the help of an example.
Taxpayer A, aged 35, has a taxable annual income of Rs. 10 lakhs and he has opted for the new tax regime. Considering the tax slab of 15% applicable, the individual has to pay a tax of Rs. 62, 400.
Now, consider taxpayer B, aged 40, whose taxable income is also Rs. 10 lakhs and he has opted for the old tax regime, availing total deductions of Rs. 1,00,000. Coming under the tax slab of 20% applicable, the individual has to pay a tax of Rs. 96,200.
Thus, a taxpayer can save Rs. 33,800 if he opts for the new tax regime.
Some estimates: Old regime vs. new regime
With the introduction of the new tax regime, individuals have the option to maximize their savings by selecting the option that suits them best. Under the old regime, taxpayers enjoyed some benefits like Section 80C claims, HRA, and LTA exemptions. On the other hand, the new system lowers taxes, but nearly all of the allowable deductions and credits are eliminated. Based on estimates, there are considerable differences between the old and new tax regimes. Check out the Income Tax Calculator available at the Income Tax’s e-filing portal to calculate your tax liability under each regime to make an informed decision.
Summing up old tax regime vs. new tax regime
Indian taxpayers now have the flexibility to choose between the the old and new tax regime. In the old system, individuals can avail a number of tax-savings options such as housing loan interest payments and premiums paid on life insurance. The new system of taxation simplifies the tax filing and computation procedures while providing lower tax rates without the option to avail deductions and exemptions.
Primarily, the difference in tax rates and exemptions available demarcates the old and new tax regimes. Individuals can choose either of the two depending on their individual financial situation. Individuals with large deductions may find the old system advantageous, while those looking for a simple tax structure may find the new regime appealing.
