The Ultimate Guide to the Old Tax Regime vs New Tax Regime

A lot of people were confused by the Budget 2023 about whether to choose the old or new tax systems. In the 2023 Budget, the government included a number of rewards to get people to follow the new rules.  People who pay taxes should be able to tell the difference between the two systems now that these changes have been made. The old tax system will still be in place, even though the new one is now the default one.

Which tax system is better for me: the old one or the new one? How can I lower my tax bill if I choose the new tax regime? What benefits will I get under the old regime? To get the answers to these questions and make smart decisions about your income tax filing, you need to know how the old and new tax systems compare in the FY 2023-24 (AY 2024-25). There were a lot of changes in Budget 2023. The major goal was to make the new tax system more appealing. The point of these changes was to get more and more people to switch to the new tax system. There are two types of tax systems: the old and the new. This piece of blog will help you decide which one is best for your finances and tax planning.

New Tax Regime

In Budget 2020, a new tax system was put in place. The tax slabs were changed, and people were given lower tax rates. People who choose the new system, on the other hand, can't get a lot of tax breaks and benefits, like HRA, LTA, 80C, 80D, and more. This is why not many people wanted to use the new tax system. To get people to switch to the new system, the government made 5 major changes in the Budget 2023. These changes will stay in place for FY 2024–2025 as well, since there were no changes made to the Interim Budget 2024. These are them:

• Greater Tax Refund: People with incomes up to ₹7 lakhs can now get a full tax refund. In the old tax system, this limit was ₹5 lakhs. People who make up to ₹7 lakhs will not have to pay any tax under the new system. 
• Simplified Tax Rates: The amount of tax that doesn't need to be paid has been raised to ₹3 lakhs, and the new tax rates are: 

• Here is a comparison of the tax rates under both systems:

• Standard Deduction and Deduction for Family Pension:

1. Salary income: The normal deduction of ₹50,000 was only available under the old tax system. It is now also available under the new system. With this and the refund, you will get ₹7.5 lakhs in tax-free income under the new rules.
2. Family pension: People who get a family pension can deduct either ₹15,000 or a third of their income, whichever is less. 
3. Surcharge for Rich People Has Been Cut: The surcharge rate for people with income over ₹5 crores has been cut from 37% to 25%. Their real tax rate will drop from 42.74% to 39% because of this move. 
4. Higher Leave Encashment Exemption: The amount of money that non-government workers can deduct has been raised eight times, from ₹3 lakhs to ₹25 lakhs.
5. Default Regime: The new income tax regime will be the default choice from FY 2023–24 on. For the old system to stay in place, you need to send in both the income tax report and Form 10IEA before the due date. You can switch between the two systems once a year to see which one gives you the best tax breaks.

Old Tax Regime

The tax system that was in place before the new regime was put in place is called the "old regime." There are more than 70 exemptions and discounts under this system, such as the HRA and LTA, that can lower your taxable income and your tax payments. Section 80C is the most famous and generous tax break. It lets you lower your taxable income by up to Rs.1.5 lakh. People who pay taxes can choose between the old and new tax systems.

Also Read: Know the documents required for GST registration of a company

Do you know how to choose between the old tax regime and the new one?

When an employer asks for an investment declaration so that taxes can be taken out of a worker's pay, that worker should think about the pros and cons of both tax systems before deciding which one to use. If they don't, the employer may take a bigger chunk of your salary in taxes.

You need to look at the tax breaks and benefits that were available under the old tax system before you choose between the two. One can figure out how much tax they owe by adding up all of their qualifying deductions and exemptions and then finding their net taxable income under the old system.

Next, this tax debt from the old tax system should be compared to this tax debt from the new tax system. Choosing the tax system that lowers your tax bill is usually the best choice. You should let your boss know about this choice so that they can change the TDS (Tax Deducted at Source) that is taken out of your pay. This makes sure that the right amount of tax is taken out every month, in line with the chosen tax system, and reduces the chance of having to pay or get back tax at the end of the financial year.

Old Vs New Tax Regime: Which is better for individuals?

Whether to switch to the new or old tax system relies on a number of things, such as:

• Financial Goals: Before choosing a tax system, it is always a good idea to think about your financial goals. You will benefit from the new tax system if you are open with your investments and don't want to put your money into things that will save you money on taxes. But if you want to save for retirement or build a fund for a long-term goal, the old tax system may be better for you because it lets you deduct contributions to a number of different investment vehicles.
• Simplicity: The new tax system documentation process is easy, and taxpayers don't have to figure out and claim deductions and exemptions. This makes it easier for taxpayers to file their ITR quickly.
• Level of income: The tax rates are lower under the new system than they were under the old system. If you make more money, the new tax system might be better for you. If a person makes INR 9 lakh a year, they will have to pay INR 45,000 in taxes, which is 5% of their taxable income. This is less than the INR 92,500 in taxes that the same person would have had to pay under the old tax system, which is INR 47,500. Also, a person whose yearly income is INR 15 lakh will have to pay INR 1.5 lakh in taxes under the new tax regime introduced in budget 2023. This is less than the INR 1.87 lakh in taxes that person would have had to pay under the new tax regime rates that were in place before budget 2023. The decrease in tax liability is due to the lower tax rates under the new tax system, which has revised tax slabs and rates to relieve taxpayers.
• Amounts you can deduct and not pay: Under the old tax system, you could deduct Rs 1.5 lakh from the interest on a home you lived in yourself under Section 80C and Rs 2 lakh under Section 24(b). In other words, under the old tax system, you could get a straight credit of Rs. 3.5 lakh. But under the new tax system, you can't get ones like that.

Breakeven threshold to choose between New Vs Old tax regime

The breakeven point is the amount of money where the two tax systems will have the same effect on tax payments. You should stay in the old tax system if the amount of your deductions and exemptions in the old system is higher than the level of income at which you would break even. It is better to switch to the new tax system if the breakeven point is higher.

In Budget 2023, the rebate under Section 87A will be raised for people who choose a new tax system. People who used to pay no income tax on income up to Rs 5 lakh will now pay no income tax on income up to Rs 7 lakh. There is also a minimum deduction of Rs. 50,000 for salaried people under the new tax system.

Because of deductions, rebates, and changes to the income tax slab, paid people will not have to pay any taxes on incomes up to Rs 7.5 lakh a year. So it's clear that we need a new tax system.

We've figured out a breakeven point for different amounts of income above 7.5 lakh. Before the break-even point, there will be no change in the amount of tax that needs to be paid under either regime.

If the sum of the deductions and exemptions you were able to get under the old system are more than the amount of money you would need to make to break even, then you should stay with the old system. The new system may be better for you if the breakeven point is higher than the total amount of discounts and exemptions you are eligible for.

If you have salary income:

Conclusion:

A lot of people often wonder why the old and new tax systems are so different from each other. The new income tax system is meant to help people who have more personal obligations, like paying back personal or vehicle loans or medical bills for parents or dependents, or who don't want to do a lot of tax work or who don't get many tax breaks because they don't qualify for section 10 exemptions, standard deductions, tax on employment, employer contributions to pension schemes, etc. The old tax system, on the other hand, can save seniors more money on taxes. This is because Section 80TTB lets them claim Rs.50,000 as interest income relief, and the older people who live in those areas feel safer under the old tax system.

There are pros and cons to both the old and new tax systems. People used to be more likely to save because of the way taxes were set up. But now, because of fewer breaks and exemptions, the new tax system favors workers with lower incomes and investments. People think that the new tax system is better and easier to use because it has fewer records and makes tax fraud less likely. But because each person's deductions and exclusions are different, the two systems need to be carefully compared to find the one that works best for each person.