With the Union Funds 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 Funds 2023, the Authorities introduced main adjustments to the brand new tax regime to encourage increased adoption by taxpayers. There are main variations between the previous and the brand new tax regime, similar to completely different tax slab charges and the therapy of deductions and exemptions. Earlier than you go for both, you will need to 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 earnings 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 can also make an knowledgeable resolution 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 Funds 2020. In 2023, main adjustments had been introduced to the brand new tax slab of earnings tax in order that extra people are inspired to undertake it. Listed here are some options of the brand new tax regime:
- The fundamental exemption restrict is Rs. 3 lakh, which means no earnings tax must be paid on the primary three lakhs of your earnings. Earlier than the adjustments, this restrict was Rs 2.5 lakh beneath the brand new regime.
- Beneath Part 87A, the tax rebate was once Rs. 5 lakh, which has been elevated to Rs. 7 lakh from the monetary yr 2023-24.
- If somebody’s earnings is above Rs. 7 lakh, the next tax slabs are relevant:
Earnings | Tax Price |
As much as Rs. 3 lakh | None |
Between Rs. 3 lakh and Rs. 6 lakh | 5% |
Between Rs. 6 lakh and Rs. 9 lakh | 10% |
Between Rs. 9 lakh and Rs. 12 lakh | 15% |
Between Rs. 12 lakh and Rs. 15 lakh | 20% |
Over Rs. 15 lakh | 30% |
- 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 earnings 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 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, complete tax on earnings of Rs. 8 lakh = Rs. 15,000 + Rs. 20,000 = Rs. 35,000.
(Notice that it is a easy instance with out commonplace deduction or cess to showcase progressive taxation)
- The brand new tax regime permits salaried taxpayers to say an ordinary deduction of Rs. 50,000.
- A typical deduction of Rs 15,000 may be claimed by people receiving a household pension.
- For HNIs (Excessive-Web-Value People) the surcharge over Rs. 5 crore earnings has additionally seen a discount from 37% to 25%.
- Beforehand, the exemption restrict on depart encashment for non-government salaried people was Rs. 3 lakh. With the change in 2023, the restrict was elevated to Rs. 25 lakh.
- One of the vital essential features of the brand new tax regime is that it doesn’t permit people to say numerous exemptions and deductions similar to those beneath Part 80C, 80D, 80E, 80G, and others of the Earnings Tax Act, and likewise different tax advantages similar to Home Lease 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. Should you don’t particularly inform your employer you might be choosing the previous regime, the TDS calculation in your wage shall be completed on the premise of the brand new regime.
Additionally Learn: Key Benefits of Tax Planning
Previous Tax Regime
The Previous Tax Regime has increased tax charges in comparison with the brand new regime, however due to the numerous 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 previous regime:
- Beneath 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 Publish Workplace Schemes similar to Sukanya Samriddhi Yojana, Nationwide Financial savings Certificates, and Senior Residents Financial savings Scheme.
- Exemptions on Depart Journey Allowance and Home Lease 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 dad and mom beneath 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 presents over 70 deductions and exemptions.
Listed here are the earnings tax slabs for the previous regime:
Earnings | Tax Price |
As much as Rs. 2.5 lakh | None |
Between Rs. 2.5 lakh and Rs. 5 lakh | 5% |
Between Rs. 5 lakh and Rs. 10 lakh | 20% |
Above Rs. 10 lakh | 30% |
A easy instance of how tax is calculated beneath the previous regime (with out cess and commonplace 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.
- Complete tax on earnings of Rs. 9 lakh = Rs. 12,500 + Rs. 80,000 = Rs. 92,500
If you’re utilizing this construction to file your taxes, keep 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 earnings tax return together with Kind 10-IEA.
Now that you realize the fundamentals of each tax buildings, let’s evaluate the previous vs new tax regime.
Additionally Learn: Tricks to Save Earnings Tax on Wage
Distinction Between Previous Vs New Tax Regime: Which is Higher?
Let’s mix the earnings tax slabs to get a greater understanding of latest regime vs previous regime calculation:
Earnings | Previous Tax Regime Price | New Tax Regime Price |
As much as Rs. 2.5 lakh | None | None |
Between Rs. 2.5 lakh and Rs. 3 lakh | 5% | None |
Between Rs. 3 lakh and Rs. 5 lakh | 5% | 5% |
Between Rs. 5 lakh and Rs. 6 lakh | 20% | 5% |
Between Rs. 6 lakh and Rs. 7.5 lakh | 20% | 10% |
Between Rs. 7.5 lakh and Rs. 9 lakh | 20% | 10% |
Between Rs. 9 lakh and Rs. 10 lakh | 20% | 15% |
Between Rs. 10 lakh and Rs. 12 lakh | 30% | 15% |
Between Rs. 12 lakh and Rs. 15 lakh | 30% | 20% |
Above Rs. 15 lakh | 30% | 30% |
Moreover,
Previous Tax Regime | New Tax Regime |
Tax charges are increased. | Tax charges are decrease |
Presents many exemptions and deductions that may considerably scale back tax legal responsibility. | Doesn’t supply as many deductions and exemptions in comparison with the previous tax regime. |
The tax submitting course of is slightly complicated. | Simplifies the tax submitting course of. |
So previous regime vs new regime, which one is healthier? Effectively, as you possibly can see each the regimes have their execs and cons. The higher regime is in fact whichever means that you can preserve probably the most of your hard-earned cash, which in the end will depend 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 should utilize tax calculators on-line to find out which of the 2 regimes will will let 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 earnings of Rs. 12 lakh beneath each tax regimes – previous and new.
New Tax Regime Calculation:
A typical deduction of Rs. 50,000 will apply right here, so the taxable earnings 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
- 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 earnings of Rs. 12 lakh = Rs. 15,000 + Rs. 30,000 + Rs. 37,500 + Rs. 3,300 = Rs. 85,800
Previous Tax Regime Calculation:
A typical deduction of Rs. 50,000 will apply right here as properly, so the taxable earnings 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
- 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 earnings of Rs. 12 lakh = Rs. 12,500 + Rs. 1,00,000 + Rs. 45,000 + Rs. 6,300 = Rs. 1,63,800
Lastly, the entire tax quantity beneath the previous regime is Rs. 1,63,800 and the quantity beneath the brand new regime is Rs. 85,800. After all, this isn’t considering 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 dwelling mortgage curiosity, and donated Rs. 20,000 to charity. This can apply a Rs. 3,10,000 deduction beneath Chapter VI A. So calculating once more beneath the previous regime:
- Taxable earnings: Rs 12,00,000 – Rs. 50,000 (commonplace 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
- 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 complete deduction quantity is lower than Rs. 1.5 lakh, the brand new regime could also be extra suited to you. If in case you have maximised your deductions and so they exceed Rs. 3.75 lakh, then the previous regime could also be extra suited to you. Any deduction complete between Rs. 1.5 lakh and Rs. 3.75 lakh, and your optimum regime will rely upon how a lot your taxable earnings is.
Moreover, if you wish to file your taxes with none trouble, you possibly can go for the brand new tax regime because it doesn’t contain complicated deductions and exemptions calculations. Should you’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 earnings, whichever is decrease, then selecting the previous 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 previous tax regime, some advantages nonetheless apply:
- Customary deduction of Rs. 50,000 for salaried people.
- Customary deduction on hire is relevant.
- Exemption on earnings from life insurance coverage and agricultural farming.
- Compensation on retrenchment.
- Exemption on depart 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 here are some benefits and downsides of the brand new tax regime:
Professionals | Cons |
Tax charges are decrease. | Doesn’t permit taxpayers to say as many deductions and exemptions because the previous tax regime. |
Makes tax calculation simpler whereas lowering the burden of compliance. | Doesn’t encourage people to avoid wasting and make investments as a lot because the previous regime. The deductions incentivise people to take a position. |
Permits people to discover completely different funding alternatives as they don’t seem to be restricted by particular deductions. | Switching again to the brand new tax regime after opting out might show difficult for people with enterprise {and professional} earnings. Such people have a one-time alternative. |
Conclusion
Deciding between the previous regime and the brand new regime is usually a powerful alternative. When you’re making a choice, you shouldn’t simply preserve your taxable earnings in thoughts, but in addition the exemptions and deductions beneath the 2 buildings that will let 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 a number 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 previous and new regimes and suggests the most effective path to take. As a result of paying taxes is a yearly obligation, the cash knowledgeable can assist 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 assist you determine alternatives that may lead you to extra tax advantages.
FAQs:
Which is healthier previous tax regime or the brand new tax regime?
The selection between the previous tax regime and the brand new tax regime will depend on one’s distinctive monetary circumstances. Whereas you will get decrease earnings 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 possibly can take recommendation from a tax planner to decrease your tax legal responsibility as a lot as potential.
Which tax regime is healthier for 10 lakhs CTC?
Not counting commonplace deductions, in case your complete 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. Should you don’t have quite a lot of funding in tax-saving schemes and your complete deductions are lower than Rs. 2.6 lakh, then you possibly can 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 then again 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, in addition 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 staff?
Whether or not or not the brand new tax regime is healthier for salaried staff will depend 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 beneath the brand new regime however will beneath the previous regime. If a salaried worker has made minimal investments in devices that give advantages solely beneath the previous regime, they will go for the brand new regime.
Can I swap between the previous and new tax regime?
Sure, while you file your taxes yearly, you may have the choice to decide on between the previous and new tax regimes. Should you select the brand new tax regime, you can not declare the advantages beneath the previous regime for that exact yr. Subsequent yr you possibly can swap to the previous regime do you have to need. Individuals with enterprise {and professional} earnings, nonetheless, can solely swap as soon as.
Are there any limitations to the brand new tax regime?
Sure, whereas the brand new tax regime presents decrease earnings tax charges in comparison with the previous regime, it additionally received’t will let you declare numerous deductions and exemptions given beneath Sections 80C, 80D, 80E, 80G, and others of the Earnings Tax Act. Additionally, advantages similar to Home Lease Allowance (HRA) and depart journey allowance (LTA) usually are not relevant beneath the brand new tax regime, so it could restrict your tax-saving alternatives.
Can I declare deductions beneath each the previous and new tax regimes?
No, while you file your taxes every monetary yr, it’s a must to decide one between the previous and the brand new tax regimes.