Old tax regime v/s New tax regime – Which one you should opt for?
The Hon’ble Finance Minister presented the budget for the fiscal year 2023-24 with the basic intention of minimum government – maximum governance and reduction of overlapping compliances. In the same spirit and in order to increase the popularity of new tax regime among individuals and HUFs, the Government has announced majority of its amendments in the new tax regime prescribed under section 115BAC of the Income-tax Act, 1961 (‘IT Act’). Whereas there were no changes made under any provisions of the Act which affects the tax payer opting for the old tax regime.
Following key amendments have been announced under the new tax regime in the budget 2023. A comparison of proposed new tax regime vis-à-vis the old tax regime is provided below:
- The new tax regime has been made the default regime. However, the tax payer can opt for the old tax regime if they wish to.
- Tax slab rates:
Proposed rates for FY 2023-24
Total income
Rate
Up to 3,00,000
NIL
3,00,001 – 6,00,000
5%
6,00,001 – 9,00,000
10%
9,00,001 – 12,00,000
15%
12,00,001 – 15,00,000
20%
Above 15,00,000
30%
Tax rates under old regime
Total income
Rate
Up to 2,50,000
NIL
2,51,001 – 5,00,000
5%
5,00,001 – 10,00,000
20%
Above 10,00,000
30%
- Rebate u/s 87A:
- The rebate under new regime is proposed to be increased to Rs. 25,000 i.e. if a tax payer’s taxable income is above Rs. 3 lakhs but up to Rs. 7 Lakhs, then he will be granted a rebate under section 87A and he not be liable to pay any tax.
- Whereas under the old regime, there is no change in the existing rebate of Rs. 12,500 i.e. if a tax payer’s taxable income is above Rs. 2.5 Lakhs but up to Rs. 5 Lakhs, then he will be granted a rebate under section 87A and he not be liable to pay any tax.
- Surcharge: The highest surcharge rate of 37% was applicable on income above Rs. 5 crores, this rate has been reduced to 25% in the new tax regime. As a result of this, overall tax rate of individuals whose income is more than Rs. 5 crores will decrease from 42.74% to 39%. No such relief in surcharge granted under old regime.
- Deductions: Certain major deductions and exemptions that are available under the Old tax regime are as follows:
- Deduction u/s 80TTA/ 80TTB
- Leave Travel allowance [Section 10(5)]
- House Rent allowance [Section 10(13A)]
- Children education allowance [section 10(14)]
- Interest on housing loan on self- occupied or vacant property (section 24)
- Chapter VI- A deduction (section 80C, 80D, 80E and so on)
- Employees (own) contribution to NPS [Section 80CCD(1b)]
- Donation to Political party/ trust, etc.
- Additional depreciation under section 32
- Investment allowance under section 32AD
- Sector-specific business deductions under section 33AB and 33ABA
- Expenditure on scientific research under section 35
- Capital expenditure under section 35AD
- Exemption under section 10AA for SEZ units
The above deductions and exemptions are not available under new regime. However, the following important deductions are available under both the tax regimes:
- Conveyance allowance received to meet the conveyance expenditure incurred as part of the employment.
- Any compensation received to meet the cost of travel on tour or transfer.
- Perquisites for official purposes.
- Exemption on voluntary retirement 10(10C), gratuity u/s 10(10) and Leave encashment u/s 10(10AA).
- Interest on Home Loan on let-out property (Section 24)
- Deduction for employer’s contribution to NPS account (Section 80CCD (2)).
- Deduction for additional employee cost (Section 80JJA).
- Standard deduction of Rs. 50,000 for salaried persons as per section 16 and Profession tax deduction of Rs.2,500
- Deduction of amount paid or deposited in the Agniveer Corpus Fund under Section 80CCH (2).
- Opting for old tax regime:
With effect from AY 2024-25, the new tax regime has been made a default regime. Hence, now if a tax payer wants to continue with the old regime, he will have to opt for it in a prescribed manner.
In case of individual or HUF with business or professional income, they can opt for the old regime before the due date of filing the return of income. Further, they have the option to come back to the new tax regime only once in their lifetime unless the individual or HUF ceases to have any business or professional income.
In case of individual or HUF who do not have business or professional income, the selection of old tax regime need to be done on a year-on-year basis.
- Illustrations:
Let’s try to understand the difference between old regime and new regime with few illustrations.
Illustration 1 – Salaried person
Old tax regime
New tax regime
Particulars
Amount
Particulars
Amount
Salary after Std deduction
15,00,000
Salary after Std deduction
15,00,000
Interest income
1,00,000
Interest income
1,00,000
Total
16,00,000
Total
16,00,000
Less: Deductions
Less: Deductions
80C
(1,50,000)
None
NPS – 80CCD(1b)
(50,000)
HRA
(4,20,000)
Medical insurance – self
(25,000)
Medical insurance – parents
(25,000)
80TTA
(10,000)
Total taxable income
9,20,000
Total taxable income
16,00,000
Tax on above
96,500
Tax on above
1,80,000
*Assumption – Rent payment of 40,000 per month and a basic salary of 6,00,000 p.a.
Illustration 2 – Salaried person
Old tax regime
New tax regime
Particulars
Amount
Particulars
Amount
Salary after Std deduction
30,00,000
Salary after Std deduction
30,00,000
Interest income
3,00,000
Interest income
3,00,000
Total
33,00,000
Total
33,00,000
Less: Deductions
Less: Deductions
80C
(1,50,000)
None
NPS – 80CCD(1b)
(50,000)
HRA
(5,10,000)
Medical insurance – self
(25,000)
Medical insurance – parents
(25,000)
80TTA
(10,000)
Total taxable income
25,30,000
Total taxable income
33,00,000
Tax on above
5,71,500
Tax on above
6,90,000
*Assumption–Rent payment of 55,000 per month and a basic salary of 15,00,000 p.a.
Illustration 3 – Business / professional income with home loan
Old tax regime
New tax regime
Particulars
Amount
Particulars
Amount
Business/prof income
20,00,000
Salary after Std deduction
20,00,000
Interest income
1,50,000
Interest income
1,50,000
Total
21,50,000
Total
21,50,000
Less: Deductions
Less: Deductions
80C
(1,50,000)
None
NPS – 80CCD(1b)
(50,000)
Interest on home loan
(2,00,000)
Medical insurance – self
(25,000)
Medical insurance – parents
(25,000)
80TTA
(10,000)
Total taxable income
16,90,000
Total taxable income
21,50,000
Tax on above
3,19,500
Tax on above
3,45,000
Illustration 4 – Business / professional income without home loan
Old tax regime
New tax regime
Particulars
Amount
Particulars
Amount
Business/prof income
20,00,000
Salary after Std deduction
20,00,000
Interest income
1,50,000
Interest income
1,50,000
Total
21,50,000
Total
21,50,000
Less: Deductions
Less: Deductions
80C
(1,50,000)
None
NPS – 80CCD(1b)
(50,000)
Medical insurance – self
(25,000)
Medical insurance – parents
(25,000)
80TTA
(10,000)
Total taxable income
18,90,000
Total taxable income
21,50,000
Tax on above
3,79,500
Tax on above
3,45,000
- Conclusion:
Though the Government is trying to push the tax payer to opt for the new tax regime, the old one seems to look more lucrative with the number of deductions available to the tax payer. As evident from the above illustration, a tax payer who has house rent or home loan interest liability, may always want to remain in the old regime to avail the tax benefit on such large payments. Each tax payer should evaluate which option is better for them depending upon the facts of each tax payer.
However, it is likely that the Government may eventually make the new regime further lucrative and gradually make it mandatory in the coming years.
Authors:
Karan Vakharia
Partner | Email: karan.vakharia@masd.co.in | LinkedIn Profile
Nishika Acharya
Associate Consultant | Email: nishika.acharya@masd.co.in | LinkedIn Profile
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