Old Tax Regime vs New Tax Regime

When it comes to paying taxes in India, things have gotten a bit more interesting lately. The government has introduced a new tax system alongside the old one, giving taxpayers more options. But with choice comes the need to understand what's best for you. Let's break down the old and new tax regimes for 2024-25 in simple terms so you can make an informed decision about which one suits you better.

What is an income tax slab?

Think of income tax slabs as different levels of a staircase. As your income climbs higher, you pay a higher percentage of tax on the money you earn at each level. This system is designed to be fair - people who earn more pay a higher rate on their additional income.
In India, we have separate tax slabs for different age groups:

● People under 60 years old
● Senior citizens (60 to 80 years)
● Super senior citizens (above 80 years)

The government often tweaks these slabs during the annual budget announcements to adjust for inflation and economic conditions.

New Tax Regime

The new tax regime, introduced in 2020 and further modified in the 2023 budget, aims to simplify the tax structure. Here's what you need to know:

1. It offers lower tax rates compared to the old regime.
2. There are fewer deductions and exemptions available.
3. It's now the default option unless you choose otherwise.

On July 23, 2024, Finance Minister Nirmala Sitharaman introduced adjustments to the tax structure under the revised tax regime. These changes reflect a difference in tax slabs before and after the budget.

The 2024 Budget has increased the standard deduction to ₹75,000 and the family pension deduction to ₹25,000 under the new tax system. These changes will result in a tax savings of ₹17,500 for taxpayers.

Here are some key features of the New Tax Regime

● Tax Rates: Offers lower rates across different income slabs but requires forgoing many deductions and exemptions.

● Default Option: Automatically applied unless the old regime is specifically chosen.

● Exemption Limit: Increased to ₹3 lakhs from ₹2.5 lakhs in the old regime.

● Tax Rebate: Under Section 87A, a tax rebate is available for income up to ₹7 lakhs, compared to ₹5 lakhs in the old regime.

● Standard Deduction: ₹75,000 for salaried individuals; family pension deduction increased to ₹15,000 or 1/3rd of the pension, whichever is lower.

● Surcharge Reduction: For high-income earners, the maximum surcharge rate is reduced from 37% to 25% on income exceeding ₹5 crores.

● Leave Encashment: The exemption limit for non-government employees increased to ₹25 lakhs.

● LTCG Benefit: Not available on debt funds invested after March 31, 2023.

Old Tax Regime

The old tax regime has been around for a long time and offers various deductions and exemptions. Here's a quick look at the tax slabs under the old regime:

Here are some key features of the Old Tax Regime:

● Section 80C: Allows deductions up to ₹1.5 lakhs for investments in specified savings schemes.

● Section 80D: Offers deductions up to ₹50,000 for medical expenses.

● Section 80TTB: Permits deductions up to ₹10,000 on interest income from savings accounts and post office deposits.

● House Rent Allowance (HRA): Deductible based on specific calculations.

● Leave Travel Allowance (LTA): Deductible as per prescribed rules.

● Tax Rebate: Available under Section 87A for income up to ₹5 lakhs.

● Standard Deduction: Salaried individuals can claim up to ₹50,000.

● The old regime allows for various deductions like 80C investments, home loan interest, and more, which can significantly reduce your taxable income.

Difference Between Old vs New Tax Regime: Which is Better?

Choosing between the old and new tax regimes depends on several factors, including your income level, investment goals, and the simplicity of tax filing. Here's a breakdown to help you decide:

Investment Goals

● Old Regime: Ideal if you have long-term investment goals such as retirement savings or building a financial corpus. This regime allows you to claim deductions on contributions to various investment instruments like PPF, ELSS, and more.

● New Regime: Suitable if you're not keen on investing in tax-saving instruments and prefer flexibility. It offers lower tax rates without requiring specific investments.

Simplicity

● Old Regime: Involves calculating and claiming multiple deductions and exemptions, which can make tax filing more complex.

● New Regime: Simpler, as it eliminates the need for detailed documentation and calculation of deductions, making the tax filing process quicker and easier.

Income Level

● Old Regime: May be more beneficial for those with higher incomes who can maximize deductions and exemptions.

● New Regime: Offers lower tax rates, making it more beneficial for individuals with higher incomes. For example, as per the 2023 budget, an individual earning ₹9 lakh annually would pay ₹45,000 in taxes under the new regime, compared to ₹92,500 under the old regime—a significant saving.

Deductions and Exemptions

1. Old Regime: Allows various deductions, such as ₹1.5 lakh under Section 80C and ₹2 lakh under Section 24(b) for interest on a home loan, totaling up to ₹3.5 lakh.

2. New Regime: Does not offer such deductions, though it does provide a standard deduction.

Tax under Old vs New Regime 

Let's examine the income and investment profiles of two hypothetical taxpayers for the fiscal year 2023-24:

Income and Investment Details (in ₹)

Tax Calculation for Tax Payer A

Tax Calculation for Taxpayer B