New Tax Regime vs Old Tax Regime: Which is Better for Employees

The Indian income tax system levies a tax on the taxpayers depending on their income levels. However, after 2020-21, the method of levying taxes has changed.

The new tax regime was announced where tax rates were reduced but with a reduction in tax-saving opportunities. Additionally, the government also added many incentives and bonuses in the 2023 budget to easily implement this new regime.

If you are also a taxpayer and wondering about the new regime vs old tax regime and confused about which one to choose, then this article will help you out. Below we will discuss the key differences between these two regimes and their available deductions and exemptions to help you choose the right one.

What is a Tax Slab?

Tax slabs are tiers of the taxable income. Each slab represents a range of income earned by individuals and each slab has a different tax rate. The lower your income is, the less tax you will pay in terms of percentage. Tax slabs ensure that each taxpayer pays fairly as per their salary or income.

What is the New Tax Regime?

The new tax regime came into place in Budget 2020 where the tax slabs were changed, and taxpayers were provided concessional tax rates. But those taxpayers cannot claim various exceptions and deductions like HRA, LTA, 80C, 80D, etc. Due to this reason, many taxpayers do not opt for this regime.

In the Budget 2023, the government introduced five changes that remain the same for FY 2024-2025 because no changes were made within the Interim Budget 2024. These changes are:

• Higher Tax Rebate Limit: A full tax rebate on the income up to INR 7 lakhs is introduced. But under the old tax regime, this threshold is INR 5 lakhs. It implies that the taxpayers with maximum of INR 7 lakhs income do not need to pay any tax under the new tax regime.
• Streamlined Tax Slabs: Under the new tax regime, the tax exemption limit is increased to INR 3 lakhs and the new tax slabs are as follows:

• Tax rates under old and new tax regimes are compared below:

• Standard Deduction and Family Pension Deduction

1. Salary Income: The standard ₹50,000 deduction which was only available within the old regime has also been added in the new tax regime. This, along with the rebate, makes INR 7.5 lakhs tax-free within the new tax regime.
2. Family Pension: Those who receive a family pension can also claim the deduction of INR 15,000 or one-third of the pension, whichever amount is less.
3. Reduced Surcharge for High-Net-Worth Individuals: The surcharge rate on the income over INR 5 crore is reduced from 37% to 25%. This will help bring down the effective tax from 42.74% to 39%.
4. High Leave Encashment Exemption: This exception limit for non-government employees is raised from INR 3 lakhs to 25 lakhs, which is an eight-fold increase.
5. Default Regime: From FY 2023-24, the new income tax regime has been set as the default option. However, if you wish to continue using the old regime, you must submit the income tax return with Form 10IEA before the due date.

Section 80C deduction is not available under the new regime

What is Old Tax Regime?

The old tax regime was used before the new tax regime came. Within this regime, there were over 70 exemptions and deductions available like HRA and LTA which can decrease taxable income and tax payments.

One of the most popular deductions is Section 80C, that helps taxpayers to reduce taxable income up to INR 1.5 lakh. The taxpayers are provided with an option to choose between the old and new tax regime.

List of Exemptions and Deductions in Old Tax Regime Slabs

• Leave travel allowance
• House rent allowance
• A standard deduction of INR 50,000 was available for salaried individuals.
• Deductions available under Section 80TTA/80TTB (on interests from savings account deposits)
• Entertainment allowance deduction and professional tax (For government employees)
• Tax relief on interest paid on home loan for self-occupied or vacant property u/s 24
• Deduction of INR 15,000 permitted from family pension under clause (ii a) (Section 57)
• Tax-saving investment deductions under Chapter VI-A (80C,80D, 80E,80CCC, 80CCD, 80D, 80DD, 80DDB, 80EE, 80EEA, 80EEB, 80G, 80GG, 80GGA, 80GGC, 80IA, 80-IAB, 80-IAC, 80-IB, 80-IBA, etc.) (Except, deduction under Section 80CCD (2) – employers’ contribution to NPS, and Section 80JJA) and so on.
• The popular tax-saving investment options include ELSS, NPS, PPF, and a tax break on insurance premiums.

However, one can still claim a deduction within sub-section (2) of section 80CCD. It is an employer’s contribution towards an employee’s account in NPS and section 80JJAA (for new employment).

It is also important to note that, if the employee’s contribution to EPF and NPS is above INR 7.5 lakh in a given financial year, then an employee needs to pay tax.

Difference Between Old Vs New Tax Regime: Which Income Tax Regime is Better for Employees?

The decision to stay in old regime or choose the new tax regime depends on your tax savings deductions and exemptions you are eligible for the old tax regime.

To make things easier for you, we have computed a breakeven point for different income levels of salaried individuals who are below 60 years of age.

In the next section, you can see the breakdown of old tax regime vs new tax regime and choose the right tax regime for yourself.

Breakdown of Old Tax Regime vs New Tax Regime

If the eligible deductions and exemptions under the old tax regime are higher than the breakeven threshold for the income level, then it is better you stay in the old regime. However, if the breakeven threshold for your income level is higher, then upgrading to the new tax regime is better.

The breakeven threshold point is the tax amount wherein there is no difference in tax liability for both the old and the new tax regimes.

1. If You Have Salary Income

2. If You have Income Other than Salary

Tax Under Old vs New Regime

Here are some of the calculations that can help you choose between old and new tax regime:

• When the total deductions are INR 1.5 lakhs or less, then the new regime will be beneficial

• If the total deductions are more than ₹3.75 lakhs, then the old regime would be beneficial

• When the total deductions are between ₹1.5 lakhs and ₹3.75 lakhs, it will depend on your income level

Pro Tip: You can use an income tax calculator to calculate how much tax amount you can save under both regimes to select the best regime for you.

How to Calculate the Income Tax Amount with Calculator?

An income tax calculator is a tool that helps you calculate your tax amount based on your earnings. There are many income tax software available that provide this calculator as a built-in tool to streamline your work. You can also check our website techjockey.com to get help with the top income taxation software.

Let’s see how you can use this calculator to get an idea about your tax amount:

Step 1: Select the financial year for which you want to calculate taxes.

Step 2: Select your age and click on ‘Go to Next Step‘.

Step 3: Enter the taxable salary after various exemption if you want to find our tax liability within old tax slabs. For new slabs, enter just the salary details.

Step 4: Next, add details like rental income, interest paid on rented home, interest income, etc.

Step 5: For Digital Assets income, enter your net income and select ‘Go to Next Step‘.

Step 6: To calculate tax within the old tax slab, enter the tax saving investments within section 80C, 80D, 80G, 80E and 80TTA.

Step 7: After that, choose ‘Calculate‘ to get your tax liability. You will get a comparison of the pre-budget and post-budget tax liability.

Step 8: Lastly, you will get all the tax computation details from your mail.

Deductions and Exemptions Under New Tax Regime

Let’s look at all the deductions and exemptions under the new tax regime:

Drawbacks of Old Tax Regime

• The old regime has a more intricate structure with several deductions and exemptions distributed across various sections.
• Understanding different deductions, calculating their eligibility, and maintaining proper documentation can be time consuming
• With multiple deductions and exemptions, there’s a higher chance of misinterpreting the rules and claiming ineligible deductions.
• The advantages of deductions and exemptions are often maximized for individuals in higher tax brackets. Lower income earners who don’t utilize many deductions might not see a significant advantage in the old regime.

Drawbacks of New Tax Regime

• The new regime doesn’t offer specific incentives for saving through popular options such as Public Provident Fund (PPF) and Equity Linked Saving Schemes (ELSS).
• While the new regime structure is simpler, it offers less flexibility in tax planning compared to the old tax regime.
• The new regime may not be as beneficial for senior citizens who have various medical expense deductions or individuals with significant interest income on investments.
• The new regime is relatively new, and there’s a chance that deductions or exemptions might be reintroduced in the future, making tax planning a bit less predictable.

Which to Choose Between Old Tax Regime and New Tax Regime

The choice between the old tax regime and the new tax regime will impact your financial planning and tax liability. Consider financial circumstances like deductions, investments, exceptions, etc., to identify the right regime that aligns with your financial goals.

Moreover, evaluate the tax liabilities of both these regimes to make an informed decision depending on your individual tax needs and requirements.

New Tax Regime vs Old Tax Regime FAQs