New Tax Regime Vs Old Tax Regime – What to choose?

Once again we have the same question, what we had two years back, what to choose – New Tax Regime or Old Tax Regime? This is because in the Budget 2023, some changes have been made in the new tax regime to make it more attractive. The basics have remained the same, that the old tax regime will have a fewer tax slabs and high tax rates with all the deductions and exemptions available. While the new tax regime will have more tax slabs, with comparatively lower tax rates, without claiming any exemptions / deductions.

Only individuals and Hindu Undivided Family (HUF) can exercise this option to pay tax as per the new tax regime. The new tax slabs are applicable for incomes earned between April 1, 2023 and March 31, 2024.

Let’s discuss the important points one by one, in the simplified manner.

(1) What are the tax slabs as per the new tax regime and old tax regime applicable for FY 2023-24?

Tax slabs as per the new tax regime:

Net Income Range	Income tax rates under new tax regime
Up to ₹ 3 lakh	0%
₹ 3 lakh to ₹ 6 lakh	5%
₹ 6 lakh to ₹ 9 lakh	10%
₹ 9 lakh to ₹ 12 lakh	15%
₹ 12 lakh to ₹ 15 lakh	20%
Above ₹ 15 lakh	30%

Tax slabs as per the old tax regime:

Table No. 1:- For tax payers other than senior and super senior citizens:            

Net Income Range	Income tax rates under old tax regime
Up to ₹ 2.5 lakh	0%
₹ 2.5 lakh to ₹ 5 lakh	5%
₹ 5 lakh to ₹ 10 lakh	20%
Above ₹ 10 lakh	30%

Table No. 2:- For Senior Citizen Taxpayers (i.e. who are 60 years or more but below 80 years at any time during the previous year)

            

Net Income Range	Income tax rates under old tax regime
Up to ₹ 3 lakh	0%
₹ 3 lakh to ₹ 5 lakh	5%
₹ 5 lakh to ₹ 10 lakh	20%
Above ₹ 10 lakh	30%

Table No. 3:- For Super Senior Citizen Taxpayers (i.e. who are 80 years or more at any time during the previous year)

            

Net Income Range	Income tax rates under old tax regime
Up to ₹ 5 lakh	0%
₹ 5 lakh to ₹ 10 lakh	20%
Above ₹ 10 lakh	30%

In both the regimes, health and education cess will be levied @ 4% on the amount of Income Tax. Surcharges will be levied on incomes above ₹ 50 lakh.

From the above tables of new tax regime and old tax regime it is clear that, we don’t have any separate tax rates for senior or super senior citizens in the new tax regime. 

(2) Is there any change in the basic exemption limit?

Yes, the basic exemption limit is ₹ 3 lakh in the new tax regime, which was earlier ₹ 2.5 lakh.

(3) Up to which income, you will not have to pay any tax in both the tax regimes?

In the old tax regime, if your net taxable income is up to ₹ 5 lakh, then you will not have to pay any tax (Because you will be granted a tax rebate of ₹ 12,500).

In the new tax regime, if your net taxable income is up to ₹ 7 lakh, then you will not have to pay any tax (Because you will be granted a tax rebate of ₹ 25,000).

(4) What are the deductions which are allowed in the new tax regime?

Budget 2023 has allowed standard deduction of ₹ 50,000 for salaried and pensioners (including family pensioners) in the new tax regime.

Apart from this, taxpayers can claim deduction of Employer’s contribution on account of employee in notified pension scheme as per Section 80CCD(2).

(5) What are the common deductions which are allowed in the old tax regime but are withdrawn in the new tax regime?

What are the common deductions which are allowed in the old tax regime but are withdrawn in the new tax regime?

1. Leave Travel Allowance

2. House Rent Allowance

3. Transport Allowance

4. Relocation allowance

5. Helper allowance

6. Children education allowance

7. Other special allowances [Section 10(14)]

8. Professional tax/ tax on employment

9. Interest paid on housing loan (Section 24)

10. Contribution to National Pension Scheme (NPS) - Rs. 50,000

11. Saving bank interest (Section 80TTA) – Rs. 10,000

12. Interest income for senior citizens (Section 80TTB) – Rs. 50,000

13. Investments under Section 80C – Rs. 1,50,000, which includes life insurance premium, repayment of housing loan, contribution to PF/PPF, investment in tax saving mutual funds (ELSS), amount invested in Sukanya Samriddhi Yojana, etc.

14. Medical insurance premium

15. Interest on education loan

16. Donations to specified entities like trusts, religious institutions, etc.

(6) New tax regime will be the default tax regime from FY 2023-24. What does it mean?

New tax regime has become the default tax regime, means you will have the option to continue with the old tax regime, but you have to specifically choose to opt for the same, before filing the ITR. If you do not choose to continue with the old regime, then you will be automatically diverted to the new regime, irrespective of the fact whether it is beneficial to you or not.

(7) Is it mandatory to pay income tax as per this new scheme?

No, it is not mandatory and it is completely optional. The taxpayer can choose any of the schemes which is beneficial for him/her, at the time of filing Income Tax Return.

(8) Whether the option is to be selected every year or only once?

A salaried person can choose from new or old tax regime as per his convenience in every financial year. In case an individual has a business income, he cannot choose the tax regime as per his convenience every year. If he opts for the new tax regime, he can switch back to the old tax regime only once in his lifetime.

(9) I earn income from salary. My employer is asking me now, at the beginning of the financial year, to choose my option for the payment of tax. Can I change it subsequently at the time of filing my ITR?

As discussed above, the option has to be selected at the time of filing Income Tax Return (ITR) for any particular financial year. But for salaried employees, the employer has to deduct TDS from salary income and therefore, the income and tax liability is estimated at the beginning of the year and the TDS is deducted accordingly. Therefore, the employer may ask you to choose your option at the beginning of the financial year, i.e. before the time of filing ITR. Here, you can estimate your tax liability and your tax savings payments/investments to be made during that financial year and can choose any of the options beneficial to you.

Please note that you can definitely change that option at the time of filing the ITR, if required. For example, as per your estimated income and deductions, you think that the new regime will be beneficial to you and you submitted declaration to your employer to deduct TDS as per the new tax regime. Now, at the time of filing the ITR, after making actual final calculation of income and deductions/investments, you come to know that it is beneficial for you to pay tax as per the old regime, then you can file your ITR following the old regime, irrespective of any of the options chosen earlier.

To put it straight, the option which you choose and exercise at the time of filing of ITR will be final for that particular financial year.

(10) If I want to pay tax using the new regime, then should I discontinue with my tax savings investments?

Ideally, investments should not always be linked with tax benefits. It is true that if you are going to opt for new tax regime, then you cannot claim deductions of tax saving investments made by you. But it certainly does not mean that you should stop paying life insurance premium or medical insurance premium or you should stop your regular contribution to PPF or NPS or ELSS or Sukanya Samriddhi Yojana, which are very necessary and beneficial investments for the better financial future of you and your family. Similarly, if you have already taken housing loan, then you have to continue the same for some years to come, no matter which option you choose.

Therefore, investment decisions should be linked not only with tax benefits attached to them but other factors also like your future financial goals, safety of your investments, their return generating capacity, your risk taking capacity, requirement of liquidity, etc.

I hope that this write-up will help you to understand the revised provisions related to income tax in better way and do your financial planning accordingly.