Old Tax Regime or New? Which one to choose for whom?

A new tax system for individuals simplifies taxes for low- and middle-income earners. Taxpayers can choose between the old and new systems based on their financial situation and tax planning needs. They have the option to select between the old and new systems for the financial year based on their circumstances and tax planning strategies.

First, let’s take a look at the tax rates applicable under both the new tax regime and the old tax regime.

Tax rates applicable under the Old Tax Regime

Income slabs under the Old Tax Regime	Tax rates
Income below INR 2.5 lakhs	0%
Income from INR 2.5 lakhs to INR 5 lakhs	5%
Income from INR 5 lakhs to INR 10 lakhs	20%
Income above INR 10 lakhs	30%

Tax rates applicable under the New Tax Regime (As per Budget 2024)

Income slabs under the new tax regime	Tax rates
Income up to INR 3 lakhs	0%
Income from INR 3 lakhs to INR 6 lakhs	5% on income above Rs.3,00,000
Income from INR 6 lakhs to INR 9 lakhs	Rs.15,000 + 10% of income above Rs.6,00,000
Income from INR 9 lakhs to INR 12 lakhs	Rs.45,000 + 15% on income above Rs.9,00,000
Income from INR 12 lakhs to INR 15 lakhs	Rs.90,000 + 20% on income above Rs.12,00,000
Income above INR >15 lakhs above	Rs.150,000 + 30% on income above Rs.15,00,000 Tax rates applicable under the Old Tax Regime

The tax rebate under Section 87A has been increased from Rs.5 Lakh to Rs.7 Lakh of taxable income. The tax rebate has been increased from Rs.12,500 to Rs.25,000.

Income slabs under the Old Tax Regime	Tax rates
Income below INR 2.5 lakhs	0%
Income from INR 2.5 lakhs to INR 5 lakhs	5%
Income from INR 5 lakhs to INR 10 lakhs	20%
Income above INR 10 lakhs	30%

Tax rates applicable under the New Tax Regime (As per Budget 2023)

Income slabs under the new tax regime	Tax rates
Income below INR 3 lakhs	0%
Income from INR 3 lakhs to INR 6 lakhs	5%
Income from INR 6 lakhs to INR 9 lakhs	10%
Income from INR 9 lakhs to INR 12 lakhs	15%
Income from INR 12 lakhs to INR 15 lakhs	20%
Income above INR 15 lakhs	30%

Illustration:

Below is the amount of tax payable under both the old tax regime and new tax regime without claiming any deductions and exemptions:

Annual Income	Tax payable under the old tax regime ( in INR)	Tax payable under the new tax regime ( in INR)	Tax savings (in INR)
Up to INR 5 lakhs	0	0	0
Up to INR 7.5 lakhs	65,000	31,200	33,800
Up to INR 10 lakhs	1,17,000	62,400	54,600
Up to INR 12.5 lakhs	1,95,000	1,04,000	91,000
Up to INR 15 lakhs	2,73,000	1,56,000	1,17,000

A new tax regime comes with more slabs and a lower tax rate but no way to reduce taxable income. However, the old tax regime allows you to claim deductions and exemptions of various natures to reduce the tax. But, the only challenge is to optimise your investments every year to bring down your taxable income. Hence, choosing between the old tax regime and the new tax regime is quite complex. Before deciding on which structure to choose, let’s take a look at the exemptions and deductions that were allowed in the old tax regime which you have to forgo in the new tax regime. This will help to plan the taxes accordingly and choose between both old and new tax structures.

Exemptions and Deductions not Claimable under the New Tax Regime

Leave travel allowance (LTA)
Standard deduction on salaries
Professional tax as well as an allowance for entertainment
House rent allowance (HRA)
Interest on savings account
Interest on senior citizen deposits
Interest paid on a home loan on a vacant or a self-occupied property
Family pensions
Special allowances
Contribution to various investments such as Equity Linked Savings Schemes (ELSS), Public Provident Fund (PPF), Employee Provident Fund (EPF) and NSC, etc.
Contribution to the National Pension Scheme (NPS)
Health Insurance Premium (self and family)
Interest on education loan
Interest on a home loan, etc

Most of the deductions available under Chapter VI-A of the Income Tax Act (such as 80C, 80CCC, 80CCD, 80D, 80DD, 80E, 80EE, 80G and 80GGA, etc) are not claimable under the new concessional income tax regime. Deductions allowed for employer contribution towards NPS and for new employment (80JJAA) are claimable under the new tax regime.

Old Tax Regime and the New Tax Regime – which one to choose?

Let’s take various scenarios to understand the suitability of both tax regimes and how to choose between the two.

Scenario 1: Let’s assume you are going with fewer exemptions and deductions that are usually availed by salaried individuals. Let’s say your annual income is INR 10 lakhs per year and also you are eligible for leave travel allowance and house rent allowance. Let’s assume your only savings for the year is into EPF (Employee Provident Fund). Now, let’s take a look at tax outgo in this scenario under both regimes.

Particulars	Income Tax Calculation (Amounts in INR)
Particulars	Old Tax Regime	New Tax Regime
Gross annual income	10,00,000	10,00,000
Deductions and Exemptions
Standard deduction	-50,000	50000
Employee Provident Fund	-30,000	-
Leave Travel Allowance	-30,000	-
House Rent Allowance	-60,000	-
Total	1,70,000	-
Net taxable income	8,30,000	9,50,000
Tax Slab (Old)
<INR 2.5 lakhs @ 0%	-
INR 2.5 lakhs to INR 5 lakhs @5%	12,500
INR 5 lakhs to INR 10 lakhs @20%	66,000
>INR 10 lakhs @ 30%	-
Tax Slab (New)
Income below INR 3 lakhs @ 0%		-
Income from INR 3 lakhs to INR 6 lakhs @ 5%		15,000
Income from INR 6 lakhs to INR 9 lakhs @ 10%		30,000
Income from INR 9 lakhs to INR 12 lakhs @ 15%		7,500
Income from INR 12 lakhs to INR 15 lakhs @ 20%		-
Income above INR 15 lakhs @ 30%		-
Total	78,500	52,500
Cess	3,140	2,100
Net tax outgo	81,640	54,600

Scenario 2 – Let’s say, you have invested in LIC (INR 50,000), ELSS (INR 25,000) and health insurance (INR 25,000). Now, let’s see the tax outgo with more deductions and exemptions to claim.

Particulars	Income Tax Calculation (Amounts in INR)
Particulars	Old Tax Regime	New Tax Regime
Gross annual income	10,00,000	10,00,000
Deductions and Exemptions
Standard deduction	-50,000	-50000
Section 80C	-75,000
Section 80D	-25,000
Employee Provident Fund	-30,000
Leave Travel Allowance	-30,000
House Rent Allowance	-60,000
Total	2,70,000
Net taxable income	7,30,000	9,50,000
Tax Slab (Old)
<INR 2.5 lakhs @ 0%	-
INR 2.5 lakhs to INR 5 lakhs @5%	12,500
INR 5 lakhs to INR 10 lakhs @20%	46,000
>INR 10 lakhs @ 30%	-
Tax Slab (New)
Income below INR 3 lakhs @ 0%		-
Income from INR 3 lakhs to INR 6 lakhs @ 5%		15,000
Income from INR 6 lakhs to INR 9 lakhs @ 10%		30,000
Income from INR 9 lakhs to INR 12 lakhs @ 15%		7,500
Income from INR 12 lakhs to INR 15 lakhs @ 20%		-
Income above INR 15 lakhs @ 30%		-
Total	58,500	52,500
Cess	2,340	2,100
Net tax outgo	60,840	54,600

In both scenarios, if you have fewer items to claim as deductions and exemptions, the new tax regime is useful. However, if you have a lot of claims and deductions, the old tax regime could be a better option for you. Thus, it is ideal to calculate all your exemptions, consider the deductions that you can claim, and then decide which tax regime is best for you to save on taxes.

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