Impact of New Tax Regime vs. Old Tax Regime: Which One to Choose?

There was a lot of confusion among taxpayers regarding the choice between the old and new tax regimes after the Budget 2023 was released. To encourage adoption of the new regime, the government introduced various incentives in the 2023 Budget. 

As a result of these changes, the government intends for taxpayers to transition to the new regime and eventually phase out the old one. The old tax regime will continue to exist even though the new regime is now the default tax regime.

Updates on the interim budget for 2024-2025: 

During the Interim Budget 2024-2025, no changes were made to direct taxes.

Let's take a closer look at both regimes and see which one we should choose in 2024.

The old tax regime

The old regime was the tax system that existed before the new regime was introduced. Over 70 exemptions and deductions are available under this regime, including HRA and LTA, which can reduce your taxable income. Up to Rs.1.5 lakh can be deducted from taxable income under Section 80C, which is the most popular and generous deduction. Neither the old nor the new tax regime is available to taxpayers.

The new tax regime

Tax slabs were altered in Budget 2020, and concessional tax rates were offered to taxpayers. In contrast, the new regime does not allow many exemptions and deductions, including HRA, LTA, 80C, 80D, and others. As a result, the new tax regime did not meet with widespread approval. Five key changes were introduced in Budget 2023, which will remain the same for FY 2024-2025 since no changes were made in Interim Budget 2024. The following are listed:

Higher Tax Rebate Limit: A full tax rebate has been introduced for income up to seven lakhs. It used to be $500,000 per year under the old tax regime. Under the new tax regime, taxpayers earning up to $7 lakhs won't owe any tax at all! 

Simplified Tax Slabs: The exemption limit for taxes has been raised to ₹3 lakhs, and the new tax slabs are: 

What's the difference between the old and new tax regimes?

It is based on the tax savings deductions and exemptions you are eligible for in the income tax e-filing according to old tax regime that you decide to switch to the new tax regime or remain in the old tax regime. 

In order to make the income tax return for individuals easier, we've calculated the breakeven point for various income levels (refer to the table below) for salaried individuals under 60 years of age. Using this information, you can decide which regime is best for your s.

Tax rates under both regimes are compared as follows:

Standard Deduction and Family Pension Deduction: 

1. A standard deduction of $50,000 for salary income has now been extended to the new tax regime, which was previously available only under the old regime. As a result of this change, you will now be able to enjoy 7.5 lakhs of tax-free income each year.
2. Pension: Pensioners receiving a pension can claim a deduction of 15% or 1/3rd of the pension, whichever is lower. 
3. Increased Surcharge for High Net Worth Individuals: The surcharge rate on income over ₹5 crores has been reduced from 37% to 25%. As a result of this move, their effective tax rate will be reduced from 42.74% to 39%. 
4. Leave Encashment Exemption: Non-government employees are now exempt from encashment tax for on-call leaves up to $25 lakhs, eight times as much as before.
5. Default Regime: Starting from FY 2023-24, the new income tax regime will be set as the default option. Form 10IEA must be submitted with your income tax return if you want to continue using the old system. Tax benefits can be checked by switching between the two regimes every year.

How to Choose Between Old and New Tax Regimes?

Under the old tax regime, there were tax exemptions and deductions that were important to consider when choosing between the two tax regimes. Net taxable income can be calculated after deducting all eligible exemptions and deductions. The tax liability under the old tax regime can be compared to the tax liability under the new tax regime by calculating the net taxable income.

Tax Deducted at Source (TDS) should be deducted from a salary by the employer based on the regime with the lowest tax liability.

While selecting a tax regime, you should also consider any losses from house property, capital gains, Pvt Ltd Company Registration or business and profession. Even previous year's losses eligible for set off will get lapsed along with the current year's losses. The ineligibility to carry forward such losses may have an impact on your future income determination and taxation.

Conclusion

There are often disparities between the old and new tax regimes that are often questioned by individuals. 

There are advantages and disadvantages to both the old and new tax regimes. Compared to the previous tax structure, which encouraged taxpayers to save, the new tax structure favors employees with lower earnings and investments, resulting in fewer deductions and exemptions. In addition to being safer and simpler, the new tax system requires fewer records and reduces the possibility of tax evasion fraud. Individual deductions and exemptions differ greatly, so comparing the two regimes is necessary to determine which is best for each individual.

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