New Vs Old Tax Regime: Consider These Factors While Selecting Tax Regime

Old or New Tax Regime - which one should you opt for?  Has your employer also asked you to tell which income tax regime you want to adopt in the current financial year? The Old Tax Regime that has been going on for years, which provides benefits of lots of deductions and exemptions, or the New Tax Regime with better tax slabs? If you have not been able to reach any conclusion in this regard yet, then before taking any decision, understand the advantages and disadvantages of both the tax regimes thoroughly.

Amarpal S. Chadha, Tax Partner and Mobility Leader at EY India said, “The choice of tax regime, whether new or old is an important decision for the taxpayers as it directly impacts investment decisions, financial goals, and tax planning strategy. One should choose the tax regime after a thorough evaluation, comparison, and consideration of various factors.”

Till last year, the number of employees adopting the new tax regime was very low. This is the reason why the Central Government made many important changes in the new tax regime, making it better than before. Most of the benefits of tax deductions and exemptions are not available in the new tax regime. Therefore, if you have been taking advantage of them till now, then consider your profit and loss in the new financial year and make the right decision in time. The Central Government has made many such changes in the new tax regime, which have come into effect from April 1, 2023.

According to EY India’s Amarpal S. Chadha, the following factors should be kept in mind by taxpayers while choosing the tax regime: 

Tax rates and eligible deductions and exemptions – The new tax regime provides for lower tax rates as compared to the old tax regime but with limited tax deductions or exemptions. Taxpayers opting for a new tax regime will have to forgo certain specified deductions and exemptions. For salaried taxpayers, certain exemptions/deductions are not available like house rent allowance (HRA), leave travel allowance/concession (LTA/LTC), Interest on housing loan for self-occupied property, Chapter VIA deductions like life insurance premium, employee’s contribution to provident fund, Mediclaim premium, etc. Taxpayers will have to compare the tax rates as well as the eligible exemptions or deductions available under each of the tax regimes to make a choice.

Level of income – The new tax regime provides for a higher threshold of maximum amount not chargeable to tax which is Rs 3,00,000 as compared to Rs 2,50,000 in the old tax regime. Further, the new tax regime provides for a higher income threshold of Rs 7,00,000 for the purpose of calculating rebate under section 87A of the Income-tax Act, 1961 as compared to the income threshold of Rs 5,00,000 in the old tax regime. Also, the new tax regime has a maximum surcharge rate of 25% for total income exceeding Rs 5 crores which is 37% in the old tax regime. All the above factors need to be considered by a taxpayer before making a choice between the new tax regime and the old tax regime. For instance, taxpayers having taxable income up to Rs 7,00,000 will not have to pay any tax under the new tax regime. Similarly, taxpayers with taxable income of Rs 5 crores or more will benefit under the new tax regime due to a lower surcharge of 25% as compared to 37% under the old tax regime.

Investment choices – Decisions on tax regime would also depend on the investment choices, made by the taxpayer and how those investments are eligible for tax benefits under each tax regime. For example, Investments in NPS by a taxpayer (not employer contribution) are eligible for an additional deduction of Rs 50,000 under the old tax regime whereas it is not available under the new tax regime.

The old scheme still has power

Despite all the changes in the new tax regime, many benefits are still available only in the old tax regime. This is the reason why those who take advantage of all these deductions and exemptions still find the old tax regime more beneficial. However, any decision in this regard should be taken only after considering each case separately.

Which scheme is beneficial for whom?

• If your income is up to Rs 7 lakh then the new tax regime is better for you, because you will not have to pay any tax in it. Apart from this, a standard deduction of Rs 50,000 is also available in the new tax regime from this year, which was not available till last year.

• Those earning more than Rs 7 lakh annually will have to look at the status of their tax-saving investments and deductions before deciding their tax regime.

• Even if you have not made any investment to save tax nor are you in a position to claim any kind of deduction, the new tax regime is still better for you, because the tax rates in the new scheme are lower and any tax saver can have No investment required.

• Even if you are going to take advantage of only Rs 1.5 lakh exemption under 80C to save income tax, there is a strong possibility that the new tax regime will be better for you because in it you will get lower tax rates. And you will get the benefit of a better slab.

• Apart from 80C, if you also avail the benefit of tax exemption on home loans, then the old tax regime may prove to be better for you. This is because in the old tax regime, apart from availing tax exemption on principal repayment of the home loan within the limit of Rs 1.5 lakh under section 80C, you can also avail tax exemption up to Rs 2 lakh on interest repayment. In this way, you get a direct tax deduction of Rs 3.5 lakh, which is not available in the new tax regime.

• Even if you live in a rented house and get tax exemption on a substantial amount under HRA, the old tax regime may be better for you.

• In the new tax regime, the benefit of tax exemption on LTA and professional tax is also not available. Therefore, those taking advantage of these should also consider continuing in the old tax regime.

The Income Tax Department has launched a tax calculator to help you reach the right decision, available at: incometaxindia.gov.in/Pages/tools/115bac-tax-calculator-finance-bill-2023.aspx

By filling in all the necessary information including your income and investments in this calculator, you can know what will be your tax liability under which tax regime. By comparing both, you can easily decide which option is better for you.