Which is Higher New Or Previous Tax Regime?

With the Union Funds of 2020, the Authorities of India tried to simplify the prevailing tax construction by introducing a brand new tax regime. This new construction didn’t have many takers, so within the Funds 2023, the Authorities introduced main modifications to the brand new tax regime to encourage greater adoption by taxpayers. There are main variations between the outdated and the brand new tax regime, comparable to completely different tax slab charges and the therapy of deductions and exemptions. Earlier than you go for both, you have to perceive the intricacies to avoid wasting as a lot of your cash as attainable.

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 On this weblog, we’re going to take a detailed have a look at the outdated vs new tax regime so you may make an knowledgeable resolution concerning which construction can successfully minimise your tax liabilities.

New Tax Regime

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

• The essential 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 modifications, this restrict was Rs 2.5 lakh beneath the brand new regime. 

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

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

• Do not forget that this tax system is progressive. Suppose somebody earns Rs. 8 lakh a yr. That doesn’t imply {that a} straight 10% tax of Rs. 8 lakh = Rs. 80,000 shall be levied. The revenue will relatively be divided into components after which calculated. Right here is an easy instance – 

• Tax on the primary Rs. 3 lakh: 0
• Tax on the subsequent 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.

(Observe 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 typical deduction of Rs. 50,000.

• An ordinary deduction of Rs 15,000 might 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. 

• Probably the most necessary elements of the brand new tax regime is that it doesn’t enable people to say varied exemptions and deductions comparable to those beneath Part 80C, 80D, 80E, 80G, and others of the Revenue Tax Act, and likewise different tax advantages comparable to Home Lease Allowance (HRA) and Go away Journey Allowance (LTA). It’s essential to contemplate this issue earlier than deciding between the brand new vs outdated tax regime. 

• From FY 2023/24, the brand new tax regime was set because the default regime for taxpayers. If you happen to don’t particularly inform your employer you’re choosing the outdated regime, the TDS calculation in your wage shall be performed on the premise of the brand new regime. 

Additionally Learn: Key Benefits of Tax Planning

Previous Tax Regime

The Previous Tax Regime has greater tax charges in comparison with the brand new regime, however due to the various deductions and exemptions that may be claimed beneath this method, one can considerably scale back their tax liabilities. Listed here are some examples of the tax advantages beneath the outdated regime: 

• Below Part 80C of the Revenue 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 comparable to Sukanya Samriddhi Yojana, Nationwide Financial savings Certificates, and Senior Residents Financial savings Scheme.
• Exemptions on Go away Journey Allowance and Home Lease Allowance.
• Deductions on premiums paid in direction of life insurance coverage.
• Advantages on for premiums paid in direction of one’s medical health insurance in addition to premiums paid in direction of the medical health insurance of 1’s mother and father beneath Part 80D.
• Advantages on repayments made in direction of a house mortgage. 
• An ordinary deduction of Rs. 50,000 is allowed for salaried taxpayers, similar to the brand new tax regime.
• Total, the outdated tax regime provides over 70 deductions and exemptions. 

Listed here are the revenue tax slabs for the outdated regime:

A easy instance of how tax is calculated beneath the outdated 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 subsequent Rs. 2.5 lakh, 5% of Rs. 2.5 lakh = Rs. 12,500
• Tax on the subsequent Rs. 4 lakh, 20% of Rs. 4 lakh = Rs. 80,000.
• Complete 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 outdated tax regime as a result of the default between the outdated regime vs new regime is the brand new one. Earlier than the due date, submit your revenue tax return together with Kind 10-IEA.

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

Additionally Learn: Tricks to Save Revenue Tax on Wage

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

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

Moreover, 

So outdated regime vs new regime, which one is healthier? Nicely, as you’ll be able to see each the regimes have their execs and cons. The higher regime is after all whichever lets you maintain essentially the most of your hard-earned cash, which finally is dependent upon your distinctive monetary state of affairs and funding and insurance coverage technique. Thus, the brand new tax regime vs outdated doesn’t have one particular reply. You should utilize tax calculators on-line to find out which of the 2 regimes will help you maximise your tax financial savings. 

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

New Tax Regime Calculation:

An ordinary 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 subsequent Rs. 3 lakh: 5% of Rs. 3 lakh = Rs. 15,000
• Tax on the subsequent Rs. 3 lakh: 10% of Rs. 3 lakh = Rs. 30,000.
• Tax on the subsequent Rs. 2.5 lakh: 15% of Rs. 2.5 lakh = Rs. 37,500
• Complete = 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
• Complete tax on revenue of Rs. 12 lakh = Rs. 15,000 + Rs. 30,000 + Rs. 37,500 + Rs. 3,300 = Rs. 85,800

Previous Tax Regime Calculation:

An ordinary deduction of Rs. 50,000 will apply right here as nicely, so the taxable revenue is once more Rs. 11,50,000.

• No tax on the primary Rs. 2.5 lakh.
• Tax on the subsequent Rs. 2.5 lakh, 5% of Rs. 2.5 lakh = Rs. 12,500
• Tax on the subsequent Rs. 5 lakh, 20% of Rs. 5 lakh = Rs. 1,00,000.
• Tax on the subsequent Rs. 1.5 lakh, 30% of Rs. 1.5 lakh = Rs. 45,000
• Complete = 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
• Complete 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 full tax quantity beneath the outdated regime is Rs. 1,63,800 and the quantity beneath the brand new regime is Rs. 85,800. In fact, this isn’t making an allowance for the largest benefit of the outdated regime – the deductions and exemptions. 

Now suppose somebody has invested Rs. 1.5 lakh in 80C investments, contributed Rs. 50,000 in 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 beneath Chapter VI A. So calculating once more beneath the outdated 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 subsequent Rs. 2.5 lakh, 5% of Rs. 2.5 lakh = Rs. 12,500
• Tax on the subsequent Rs. 3.4 lakh, 20% of Rs. 3.4 lakh = Rs. 68,000
• Complete = Rs. 12,500 + Rs. 68,000 = Rs. 80,500
• Cess of 4% is charged: 4% of Rs. 80,500 = Rs. 3,220
• Complete 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. When you have maximised your deductions they usually exceed Rs. 3.75 lakh, then the outdated 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 problem, you’ll be able to go for the brand new tax regime because it doesn’t contain complicated deductions and exemptions calculations. If you happen to’ve closely invested in tax-saving devices and may declare a tax profit equal to roughly Rs. 4.5 lakh or 40% of your annual revenue, whichever is decrease, then selecting the outdated tax regime will present higher long-term advantages.

Exemptions beneath new tax regime

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

• Commonplace deduction of Rs. 50,000 for salaried people.
• Commonplace deduction on lease 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 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 here are some benefits and downsides of the brand new tax regime:

Conclusion

Deciding between the outdated regime and the brand new regime could be a robust selection. If you end up making a call, you shouldn’t simply maintain your taxable revenue in thoughts, but in addition the exemptions and deductions beneath the 2 buildings that help you save as a lot of your cash as attainable. As a result of there are such a lot of tax advantages given within the Revenue Tax Act, one can simply miss out on a couple of and never take full benefit of the alternatives accessible. That’s why you will need to seek the advice of a tax advisor earlier than you file your taxes. A tax advisor calculates your tax legal responsibility on each outdated and new regimes and suggests the very best path to take. As a result of paying taxes is a yearly obligation, the cash knowledgeable will help you save over a long time is critical. Furthermore, a tax advisor can maintain you up to date on the modifications in tax legal guidelines and enable you to establish alternatives that may lead you to extra tax advantages. 

FAQs:

Which is healthier outdated tax regime or the brand new tax regime?

The selection between the outdated tax regime and the brand new tax regime is dependent upon one’s distinctive monetary circumstances. Whereas you will get decrease revenue tax charges by choosing the brand new tax regime, additionally, you will should forgo the exemptions and deductions within the outdated 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 attainable.

Which tax regime is healthier 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 outdated regime is extra appropriate. If you happen to don’t have plenty 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 outdated and new tax regime 24?

The outdated tax regime is the outdated tax construction which permits taxpayers to say plenty of deductions and exemptions given within the Revenue 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 outdated construction. But when somebody opts for the brand new regime, additionally they should 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 healthier for salaried workers is dependent upon 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 beneath the brand new regime however will beneath the outdated regime. If a salaried worker has made minimal investments in devices that give advantages solely beneath the outdated regime, they will go for the brand new regime. 

Can I change between the outdated and new tax regime?

Sure, whenever you file your taxes yearly, you could have the choice to decide on between the outdated and new tax regimes. If you happen to select the brand new tax regime, you can not declare the advantages beneath the outdated regime for that individual yr. Subsequent yr you’ll be able to change to the outdated regime do you have to want. 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 outdated regime, it additionally received’t help you declare varied deductions and exemptions given beneath Sections 80C, 80D, 80E, 80G, and others of the Revenue Tax Act. Additionally, advantages comparable to Home Lease Allowance (HRA) and go away journey allowance (LTA) are usually not relevant beneath the brand new tax regime, so it might restrict your tax-saving alternatives.

Can I declare deductions beneath each the outdated and new tax regimes?

No, whenever you file your taxes every monetary yr, it’s a must to choose one between the outdated and the brand new tax regimes.