With the Union Finances of 2020, the Authorities of India tried to simplify the present tax construction by introducing a brand new tax regime. This new construction didn’t have many takers, so within the Finances 2023, the Authorities introduced main adjustments to the brand new tax regime to encourage larger adoption by taxpayers. There are main variations between the previous and the brand new tax regime, resembling totally different tax slab charges and the therapy of deductions and exemptions. Earlier than you go for both, you could perceive the intricacies to avoid wasting as a lot of your cash as potential.

The selection between the 2 buildings can confuse the taxpayers about their revenue tax slabs and relevant deductions and exemptions. On this weblog, we’re going to take a detailed take a look at the previous vs new tax regime so you may make an knowledgeable choice relating to which construction can successfully minimise your tax liabilities.

New Tax Regime

The New Tax Regime was launched by the federal government within the Union Finances 2020. In 2023, main adjustments have been introduced to the brand new tax slab of revenue tax in order that extra people are inspired to undertake it. Listed below are some options of the brand new tax regime:

• The fundamental exemption restrict is Rs. 3 lakh, that means no revenue tax must be paid on the primary three lakhs of your revenue. Earlier than the adjustments, this restrict was Rs 2.5 lakh below the brand new regime. 

• Underneath Part 87A, the tax rebate was once Rs. 5 lakh, which has been elevated to Rs. 7 lakh from the monetary 12 months 2023-24.

• If somebody’s revenue is above Rs. 7 lakh, the next tax slabs are relevant:

• Keep in mind that this tax system is progressive. Suppose somebody earns Rs. 8 lakh a 12 months. That doesn’t imply {that a} straight 10% tax of Rs. 8 lakh = Rs. 80,000 can be levied. The revenue will somewhat be divided into elements after which calculated. Right here is an easy instance – 

• Tax on the primary Rs. 3 lakh: 0
• Tax on the following Rs. 3 lakh: 5% of Rs. 3 lakh = Rs. 15,000
• Tax on the primary Rs. 2 lakh: 10% of Rs. 2 lakh = Rs. 20,000.
• Thus, whole tax on revenue of Rs. 8 lakh = Rs. 15,000 + Rs. 20,000 = Rs. 35,000.

(Word that it is a easy instance with out customary deduction or cess to showcase progressive taxation)

• The brand new tax regime permits salaried taxpayers to say a regular deduction of Rs. 50,000.

• A typical deduction of Rs 15,000 may be claimed by people receiving a household pension.

• For HNIs (Excessive-Internet-Price People) the surcharge over Rs. 5 crore revenue has additionally seen a discount from 37% to 25%. 

• Beforehand, the exemption restrict on go away encashment for non-government salaried people was Rs. 3 lakh. With the change in 2023, the restrict was elevated to Rs. 25 lakh. 

• Some of the vital features of the brand new tax regime is that it doesn’t permit people to say numerous exemptions and deductions resembling those below Part 80C, 80D, 80E, 80G, and others of the Earnings Tax Act, and in addition different tax advantages resembling Home Hire Allowance (HRA) and Depart Journey Allowance (LTA). It’s essential to think about this issue earlier than deciding between the brand new vs previous tax regime. 

• From FY 2023/24, the brand new tax regime was set because the default regime for taxpayers. When you don’t particularly inform your employer you might be choosing the previous regime, the TDS calculation in your wage can be performed on the idea of the brand new regime. 

Additionally Learn: Key Benefits of Tax Planning

Outdated Tax Regime

The Outdated Tax Regime has larger tax charges in comparison with the brand new regime, however due to the numerous deductions and exemptions that may be claimed below this technique, one can considerably cut back their tax liabilities. Listed below are some examples of the tax advantages below the previous regime: 

• Underneath Part 80C of the Earnings Tax Act, one can declare deductions of as much as Rs. 1.5 lakh by investing in devices such because the Public Provident Fund, Worker Provident Fund, Fairness-Linked Financial savings Scheme, and Unit-Linked Insurance coverage Plans. 
• Advantages by investing in Put up Workplace Schemes resembling Sukanya Samriddhi Yojana, Nationwide Financial savings Certificates, and Senior Residents Financial savings Scheme.
• Exemptions on Depart Journey Allowance and Home Hire Allowance.
• Deductions on premiums paid in the direction of life insurance coverage.
• Advantages on for premiums paid in the direction of one’s medical health insurance in addition to premiums paid in the direction of the medical health insurance of 1’s mother and father below Part 80D.
• Advantages on repayments made in the direction of a house mortgage. 
• A typical deduction of Rs. 50,000 is allowed for salaried taxpayers, similar to the brand new tax regime.
• Total, the previous tax regime provides over 70 deductions and exemptions. 

Listed below are the revenue tax slabs for the previous regime:

A easy instance of how tax is calculated below the previous regime (with out cess and customary deduction): Suppose a person has a wage of Rs. 9 lakh.

• No tax on the primary Rs. 2.5 lakh.
• Tax on the following Rs. 2.5 lakh, 5% of Rs. 2.5 lakh = Rs. 12,500
• Tax on the following Rs. 4 lakh, 20% of Rs. 4 lakh = Rs. 80,000.
• Whole tax on revenue of Rs. 9 lakh = Rs. 12,500 + Rs. 80,000 = Rs. 92,500

If you’re utilizing this construction to file your taxes, bear in mind to specify you’re choosing the previous tax regime as a result of the default between the previous regime vs new regime is the brand new one. Earlier than the due date, submit your revenue tax return together with Type 10-IEA.

Now that you realize the fundamentals of each tax buildings, let’s examine the previous vs new tax regime.

Additionally Learn: Tricks to Save Earnings Tax on Wage

Distinction Between Outdated Vs New Tax Regime: Which is Higher?

Let’s mix the revenue tax slabs to get a greater understanding of latest regime vs previous regime calculation:

Moreover, 

So previous regime vs new regime, which one is best? Effectively, as you’ll be able to see each the regimes have their execs and cons. The higher regime is after all whichever permits you to preserve probably the most of your hard-earned cash, which finally relies on your distinctive monetary state of affairs and funding and insurance coverage technique. Thus, the brand new tax regime vs previous doesn’t have one particular reply. You need to use tax calculators on-line to find out which of the 2 regimes will can help you maximise your tax financial savings. 

However let’s take one other instance: We are going to calculate the tax legal responsibility of a salaried particular person with an annual revenue of Rs. 12 lakh below each tax regimes – previous and new.

New Tax Regime Calculation:

A typical deduction of Rs. 50,000 will apply right here, so the taxable revenue is Rs. 11,50,000.

• No tax on the primary Rs. 3 lakh.
• Tax on the following Rs. 3 lakh: 5% of Rs. 3 lakh = Rs. 15,000
• Tax on the following Rs. 3 lakh: 10% of Rs. 3 lakh = Rs. 30,000.
• Tax on the following Rs. 2.5 lakh: 15% of Rs. 2.5 lakh = Rs. 37,500
• Whole = Rs. 15,000 + Rs. 30,000 + Rs. 37,500 = Rs. 82,500.
• A cess of 4% is charged once more: 4% of Rs. 82,500 = Rs. 3,300
• Whole tax on revenue of Rs. 12 lakh = Rs. 15,000 + Rs. 30,000 + Rs. 37,500 + Rs. 3,300 = Rs. 85,800

Outdated Tax Regime Calculation:

A typical deduction of Rs. 50,000 will apply right here as effectively, so the taxable revenue is once more Rs. 11,50,000.

• No tax on the primary Rs. 2.5 lakh.
• Tax on the following Rs. 2.5 lakh, 5% of Rs. 2.5 lakh = Rs. 12,500
• Tax on the following Rs. 5 lakh, 20% of Rs. 5 lakh = Rs. 1,00,000.
• Tax on the following Rs. 1.5 lakh, 30% of Rs. 1.5 lakh = Rs. 45,000
• Whole = Rs. 12,500 + Rs. 1,00,000 + Rs. 45,000 = Rs. 1,57,500
• A cess of 4% is charged: 4% of Rs. 1,57,500 = Rs. 6,300
• Whole tax on revenue of Rs. 12 lakh = Rs. 12,500 + Rs. 1,00,000 + Rs. 45,000 + Rs. 6,300 = Rs. 1,63,800

Lastly, the overall tax quantity below the previous regime is Rs. 1,63,800 and the quantity below the brand new regime is Rs. 85,800. After all, this isn’t taking into consideration the most important benefit of the previous regime – the deductions and exemptions. 

Now suppose somebody has invested Rs. 1.5 lakh in 80C investments, contributed Rs. 50,000 in the direction of NPS, paid Rs. 40,000 on schooling mortgage curiosity and Rs. 50,000 on residence mortgage curiosity, and donated Rs. 20,000 to charity. It will apply a Rs. 3,10,000 deduction below Chapter VI A. So calculating once more below the previous regime: 

• Taxable revenue: Rs 12,00,000 – Rs. 50,000 (customary deduction) – Rs. 3,10,000 (Chapter VI A deduction) = Rs. 8,40,000
• No tax on the primary Rs. 2.5 lakh.
• Tax on the following Rs. 2.5 lakh, 5% of Rs. 2.5 lakh = Rs. 12,500
• Tax on the following Rs. 3.4 lakh, 20% of Rs. 3.4 lakh = Rs. 68,000
• Whole = Rs. 12,500 + Rs. 68,000 = Rs. 80,500
• Cess of 4% is charged: 4% of Rs. 80,500 = Rs. 3,220
• Whole tax due: Rs. 80,500 + Rs. 3,220 = Rs. 83,720

Now the tax is decrease than the brand new regime! 

That is simply an instance. In case your whole deduction quantity is lower than Rs. 1.5 lakh, the brand new regime could also be extra suited to you. You probably have maximised your deductions they usually exceed Rs. 3.75 lakh, then the previous regime could also be extra suited to you. Any deduction whole between Rs. 1.5 lakh and Rs. 3.75 lakh, and your optimum regime will depend upon how a lot your taxable revenue is. 

Moreover, if you wish to file your taxes with none trouble, you’ll be able to go for the brand new tax regime because it doesn’t contain complicated deductions and exemptions calculations. When you’ve closely invested in tax-saving devices and might declare a tax profit equal to roughly Rs. 4.5 lakh or 40% of your annual revenue, whichever is decrease, then selecting the previous tax regime will present higher long-term advantages.

Exemptions below new tax regime

Whereas the brand new tax regime doesn’t present as many exemptions and deductions because the previous tax regime, some advantages nonetheless apply:

• Customary deduction of Rs. 50,000 for salaried people.
• Customary deduction on hire is relevant.
• Exemption on revenue from life insurance coverage and agricultural farming.
• Compensation on retrenchment.
• Exemption on go away encashment upon retiring.
• As much as Rs. 20 lakh gratuity obtained from the employer is exempt.
• Exemptions on employer contribution in the direction of EPF and Nationwide Pension System (NPS).
• Exemption on cash obtained as a scholarship.
• Curiosity earned and maturity on the Public Provident Fund and Sukanya Samriddhi Yojana are exempt. 
• Voluntary Retirement Scheme (VRS) proceeds as much as Rs. 5 lakh are exempt, and extra.

New tax regime: Professionals and cons

Listed below are some benefits and downsides of the brand new tax regime:

Conclusion

Deciding between the previous regime and the brand new regime could be a robust selection. When you find yourself making a choice, you shouldn’t simply preserve your taxable revenue in thoughts, but in addition the exemptions and deductions below the 2 buildings that can help you save as a lot of your cash as potential. As a result of there are such a lot of tax advantages given within the Earnings Tax Act, one can simply miss out on just a few and never take full benefit of the alternatives out there. That’s why it is very important seek the advice of a tax advisor earlier than you file your taxes. A tax advisor calculates your tax legal responsibility on each previous and new regimes and suggests the most effective path to take. As a result of paying taxes is a yearly obligation, the cash an expert might help you save over a long time is important. Furthermore, a tax advisor can preserve you up to date on the adjustments in tax legal guidelines and provide help to determine alternatives that may lead you to extra tax advantages. 

FAQs:

Which is best previous tax regime or the brand new tax regime?

The selection between the previous tax regime and the brand new tax regime relies on one’s distinctive monetary circumstances. Whereas you may get decrease revenue tax charges by choosing the brand new tax regime, additionally, you will must forgo the exemptions and deductions within the previous tax regime. Earlier than you file your taxes, you’ll be able to take recommendation from a tax planner to decrease your tax legal responsibility as a lot as potential.

Which tax regime is best for 10 lakhs CTC?

Not counting customary deductions, in case your whole deductions are greater than Rs. 2.6 lakh and you’ve got invested closely in tax saving schemes, then the previous regime is extra appropriate. When you don’t have quite a lot of funding in tax-saving schemes and your whole deductions are lower than Rs. 2.6 lakh, then you’ll be able to go for the brand new regime. 

What’s the distinction between the previous and new tax regime 24?

The previous tax regime is the previous tax construction which permits taxpayers to say quite a lot of deductions and exemptions given within the Earnings Tax Act. The brand new tax regime alternatively was launched in 2020 which permits taxpayers to pay tax at decrease charges in comparison with the previous construction. But when somebody opts for the brand new regime, additionally they must forgo deductions and exemptions given in Part 80C, 80D, and different advantages like HRA and LTA. 

Is new tax regime higher for salaried workers?

Whether or not or not the brand new tax regime is best for salaried workers relies on their monetary state of affairs. If a salaried worker has made investments in Part 80C exempt devices just like the Nationwide Pension Scheme, they won’t get any tax advantages below the brand new regime however will below the previous regime. If a salaried worker has made minimal investments in devices that give advantages solely below the previous regime, they will go for the brand new regime. 

Can I change between the previous and new tax regime?

Sure, while you file your taxes yearly, you have got the choice to decide on between the previous and new tax regimes. When you select the brand new tax regime, you can’t declare the advantages below the previous regime for that exact 12 months. Subsequent 12 months you’ll be able to change to the previous regime do you have to need. Individuals with enterprise {and professional} revenue, nonetheless, can solely change as soon as.

Are there any limitations to the brand new tax regime?

Sure, whereas the brand new tax regime provides decrease revenue tax charges in comparison with the previous regime, it additionally received’t can help you declare numerous deductions and exemptions given below Sections 80C, 80D, 80E, 80G, and others of the Earnings Tax Act. Additionally, advantages resembling Home Hire Allowance (HRA) and go away journey allowance (LTA) aren’t relevant below the brand new tax regime, so it might restrict your tax-saving alternatives.

Can I declare deductions below each the previous and new tax regimes?

No, while you file your taxes every monetary 12 months, it’s a must to decide one between the previous and the brand new tax regimes.