Old vs New Tax Regime: A Guide for Taxpayers
The income tax system in India has undergone significant transformations in recent years. With the introduction of the new tax regime in Budget 2020 and subsequent updates in Budgets 2023 and 2024, taxpayers now face the dilemma of choosing between the old and new tax regimes.
While the government intends to gradually shift taxpayers toward the new regime, the old regime remains a viable option for those who benefit from its exemptions and deductions.
This guide provides an in-depth comparison of the old and new tax regimes, helping you make an informed choice. It focuses on updated tax slabs, benefits, and FAQs to address your queries.
The new tax regime now offers simplified slabs with lower rates:
Rebate under Section 87A: Taxpayers with income up to ₹7 lakh under the new regime pay zero tax.
Increased Standard Deduction:
Salaried individuals: Deduction raised to ₹75,000.
Pensioners: Family pension deduction increased to ₹25,000.
Reduced Surcharge: Surcharge on income above ₹5 crore was reduced from 37% to 25%, lowering the maximum tax rate from 42.74% to 39%.
Leave Encashment: The tax exemption limit on leave encashment for non-government employees increased from ₹3 lakh to ₹25 lakh.
Insurance Policy Taxation: As per the Budget 2023-24 announcement, income from traditional insurance policies where the premium is more than Rs 5 lakh will not be tax-free.
Choosing between the old and new tax regimes depends on your income, deductions, and financial goals. The old regime is better suited for individuals who actively utilize exemptions and deductions to reduce their taxable income.
For example, if you invest in options like PPF, ELSS, or NSC under Section 80C, pay medical insurance premiums under Section 80D, or claim home loan interest under Section 24(b), the old regime can significantly lower your tax liability.
On the other hand, the new tax regime is ideal for those who prefer simplicity and do not want to invest solely for tax-saving purposes. It offers lower tax rates and eliminates the need for complex documentation, making it more straightforward.
With new tax updates, salaried people can now earn up to Rs 7.5 lakh annually without paying any income tax. So, if your income is below Rs 7.5 lakh, the new tax regime is clearly better.
But what if your income is higher than Rs 7.5 lakh? That’s where things get tricky. You’ll need to figure out your break-even point — the income level at which both tax regimes result in the same tax liability.
If your total eligible deductions and exemptions in the old tax regime are equal to or higher than the breakeven threshold for your income level, it is advisable to stay in the old regime.
If you have salary income, here's a quick look at the break-even point (BEP) for various income levels:
If your deductions in the old regime are less than the break-even point, the new regime might be the better option.
If your deductions are greater, then you’ll likely save more under the old regime.
This table should help you figure out where you stand and make an informed decision on which tax regime to choose.
For taxpayers with an income of ₹15 lakh or more, the decision between the old and new tax regimes requires careful consideration.
If you have substantial deductions of more than Rs.3,75,000 — like investments in PPF, ELSS, insurance premiums, or home loan interest — the old tax regime might still be more beneficial. Even though the tax rates are higher, these deductions can significantly reduce your taxable income and overall tax liability.
If you don’t have many deductions to claim and prefer a simplified tax structure, the new tax regime could be a better choice. The reduced surcharge for high earners also makes the new regime attractive for those with incomes above ₹15 lakh.
Ultimately, it’s important to calculate and compare both regimes based on your total deductions and exemptions. For high-income earners, a detailed evaluation of deductions and tax liabilities is crucial to maximize savings.
Consult a tax advisor to make an informed decision that aligns with your financial priorities and minimizes your tax burden.
What is the default tax regime for FY 2024-25?
The new tax regime is the default. Taxes will be calculated under this regime unless you specify otherwise.
Can I switch regimes every year?
Yes, salaried individuals can choose annually. For individuals with business income, switching back to the old regime is allowed only once.
What happens if I don’t choose a regime?
Your employer will default to the new regime for TDS calculations.
What deductions are unavailable in the new regime?
Popular deductions like HRA, 80C, and home loan interest are excluded under the new regime.
What deductions are allowed in the new tax regime?
Under the new tax regime, taxpayers can claim only a few specific deductions. These include a standard deduction of ₹50,000, which is available to all salaried individuals. Additionally, interest on home loans under Section 24b only on let-out properties, contribution to NPS under Section 80CCD can also be claimed, Agniveer Corpus Fund, you can claim deductions under Section 80CCH. For individuals receiving the family pension, a deduction of the lower of 1/3rd of the actual pension or ₹15,000 is allowed under the new regime.
Which form should I file to opt for the old tax regime?
To choose the old tax regime, you must file Form 10-IEA.
Are there special benefits for senior citizens in the new tax regime?
In the old tax regime, senior citizens (aged 60 and above) enjoyed a higher basic exemption limit. For them, the exemption limit was ₹3,00,000, while super senior citizens (aged 80 and above) had an exemption limit of ₹5,00,000. However, in the new tax regime, the exemption limit is the same for all individuals, regardless of age, and is set at ₹3,00,000.
How does the surcharge reduction benefit high-income earners?
The reduced surcharge from 37% to 25% lowers the effective tax rate, especially for those earning above ₹5 crore.
Are medical insurance deductions available in the new regime?
No, Section 80D deductions are only available under the old regime.
How does the Section 87A rebate work?
Taxpayers with income up to ₹7 lakh in the new regime pay zero tax due to the rebate.
What tax planning strategies work best for the old regime?
Investing in tax-saving instruments like ELSS, PPF, or NSC and availing deductions under 80C, 80D, and 80TTB are effective ways to reduce taxable income under the old regime.
Is the new regime ideal for taxpayers with no investments?
Yes, for individuals who do not claim exemptions or deductions, the new regime’s simplified structure and lower tax rates are advantageous.
Which tax regime should I choose if my income is ₹10 lakh?
For an income of ₹10 lakh, the decision between the old and new tax regimes depends on your ability to claim deductions and exemptions. If your total deductions (excluding the standard deduction) exceed ₹2.62 lakh, the old regime might save you more tax. However, if your deductions are less than 1.5 lakhs, the new regime is simpler and might result in lower tax liability.
What about an income of ₹15 lakh?
If your taxable income is ₹15 lakh, the choice becomes clearer based on deductions.
The old regime benefits individuals who do not claim deductions exceeding ₹3.58 lakh, offering a streamlined and lower tax liability.
Which regime is better for someone earning above ₹20 lakh?
For individuals earning above ₹20 lakh, the old tax regime could be favorable if deductions and exemptions exceed ₹3.75 lakh. If exemptions are equal to or less than 3.75 lakhs the reduced surcharge in the new regime (from 37% to 25%) can significantly benefit.
How about incomes above ₹50 lakh?
The new tax regime will save you ₹5,25,000 in tax.
In the new regime, you'll pay ₹12,50,000 as tax
In the old regime, you'll pay ₹17,75,000 (even with maximum deductions of ₹3.75 lakhs)
