Income tax returns and stress go together like peanut butter and jelly. They're the perfect duo for inducing anxiety and sleepless nights. Who doesn't love the thrill of gathering receipts, hunting down elusive forms, and trying to decipher tax jargons? It's like a never-ending puzzle that taunts you with a looming deadline.

 

And it’s that time of the year…again! The tax season is upon us and we are here to help you make the conscious choice you are tensed about – which regime will best suit you – the old tax regime or the new regime?

 

Keeping up with the latest trends in income tax is crucial to ensure a seamless income tax return filing experience. The inception of the new tax regime in Budget 2020 has offered taxpayers an alternative to the existing old tax regime, sparking interest in income tax circles. In this blog, we delve into the core disparities between the old and new tax regimes, specifically highlighting how they impact individuals filing their returns using the ITR-1 form. With reduced tax rates, the new tax regime entices taxpayers, but it also necessitates forgoing numerous exemptions and deductions. By grasping these distinctions, taxpayers can make well-informed decisions, opting for the tax regime that aligns best with their financial objectives and current situation.

 

Benefits of the New Tax Regime
 
In the wake of a transforming landscape, Finance Minister Nirmala Sitharaman unveiled a groundbreaking transformation in her Budget 2020 address on 1 February 2020 – the advent of the New Tax Regime. Engineered to bring order to the tax structure and lighten the load on taxpayers, this revolutionary regime marked a departure from traditional norms. The crux of the disparity between the two tax regimes lay in the varying income tax slab rates and the criteria for availing exemptions and deductions.

 

Despite the new regime disallowing numerous familiar exemptions and deductions, such as HRA, LTA, 80C, 80D, and more, a surprising trend emerged. Even after a span of three years since the inception of the new tax regime under section 115BAC, a substantial majority of taxpayers still prefer filing their Income Tax Returns (ITR) under the conventional old tax regime.

 

To encourage taxpayers to switch to the new regime, the Union Budget for 2023-24 brought about some changes, specifically tailored for the new tax system. The notable adjustments include:

 

1. Increased Limit for Tax Rebates: Under the new tax regime, the government introduced a higher tax rebate limit, extending to an income of up to INR 7 lakhs, which means that taxpayers with an income of up to INR 7 lakhs can enjoy a complete exemption from paying any tax under the new tax structure. This marked a significant increase from the INR 5 lakh threshold in the old tax regime.

    

2. Simplified Tax Slabs:  Another crucial facet of the revisions included the increase of the tax exemption limit to INR 3 lakhs. These modifications, while enhancing benefits, also aimed at streamlining the overall tax structure.

 

The crux of these changes lies in the concerted effort to render the new tax regime more favorable to taxpayers by not only offering increased benefits but also simplifying the intricate web of tax regulations. 

 

Benefits of the Old Tax Regime

The term "old tax regime" refers to the tax rules that were in effect before the introduction of the new tax system. Under this older system, taxpayers had access to a wide range of more than 70 exemptions and deductions. These included popular deductions like HRA (House Rent Allowance) and LTA (Leave Travel Allowance), which could lower taxable income and reduce tax payments.

 

One of the most substantial deductions in the old tax regime was under Section 80C. This provision allowed taxpayers to cut down their taxable income by up to INR 1.5 lakhs. This deduction covered various investments and expenses, such as contributions to EPF (Employee Provident Fund), PPF (Public Provident Fund), life insurance premiums, and tuition fees, among others.

 

Tax Slab Rates: Old v/s New Tax Regime

The introduction of the New Tax Regime brought about revised tax slabs, resulting in lower tax rates for individuals earning up to INR 15 lakhs. 

Under the New Regime, the tax brackets have been modified to ensure that individuals with lower incomes enjoy higher tax savings. The revamped tax slab rates aim to provide relief to the middle-income group, allowing them to retain a larger portion of their hard-earned income. These reforms have introduced a more progressive tax system, where individuals with higher taxable incomes are subjected to higher tax rates. This shift ensures that those who earn more contribute proportionally higher to the country's revenue.

 

Let's compare the tax slab rates for both the 'New Income Tax Regime' and the 'Old Income Tax Regime'-

 

Income Tax Slab (INR in lakhs)	Old Tax Regime	New Tax Regime (until 31 March 2023)	New Tax Regime (from 1 April 2023)
₹0 – ₹2,50,000	–	–	–
₹2,50,001 – ₹3,00,000	5%	5%	–
₹3,00,001 – ₹5,00,000	5%	5%	5%
₹5,00,001 – ₹6,00,000	20%	10%	5%
₹6,00,001 – ₹7,50,000	20%	10%	10%
₹7,50,001 – ₹9,00,000	20%	15%	10%
₹9,00,001 – ₹10,00,000	20%	15%	15%
₹10,00,001 – ₹12,00,000	30%	20%	15%
₹12,00,001 – ₹12,50,000	30%	20%	20%
₹12,50,001 – ₹15,00,000	30%	25%	20%
Above ₹15,00,000	30%	30%	30%

 

 

Changes to the Basic Exemption Limit

In the new tax regime, the basic tax exemption limit remains the same for all assesses, including senior citizens. This means that senior and super-senior citizens will not receive additional tax exemptions if they choose the new regime.

 

Improvements and Modifications in Tax Provisions

 

Standard Deduction: The government has effectively extended the standard deduction of INR 50,000 to the new tax regime as well. This deduction was previously only applicable in the old tax regime. With this feature, taxpayers opting for either of the old or new tax regimes can now reduce their taxable income by INR 50,000. However, this, along with other deductions and rebates, can result in a tax-free income of up to INR 7.5 lakhs under the new regime.

 

Deduction for Family Pension: A deduction of either INR 15,000 or 1/3rd of the pension amount, depending on whichever is lower, is now made applicable for individuals receiving family pensions. This deduction helps in reducing the taxable portion of the family pension received for such taxpayers.

 

Reduced Surcharge for High-Net-Worth Individuals: The government has further reduced the surcharge rate for individuals with an income exceeding INR 5 crores. Previously set at 37%, the surcharge rate is now lowered to 25%. This reduction in surcharge will effectively lower the tax rate from 42.74% to 39% for individuals in this income bracket.

 

Increased Leave Encashment Exemption: The exemption limit of leave encashment for non-government employees has been increased eight-fold to INR 25 lakhs, from INR 3 lakhs earlier. This means that non-government employees can avail of tax benefits on a larger portion of their leave encashment amount.

 

Default Option: From the start of FY24, the new income tax regime was set as the default option for taxpayers. Those who still wish to continue using the old tax regime must submit a form while filing their tax return. Taxpayers have the flexibility to switch between the two regimes on an annual basis, depending on their circumstances and preferences for tax savings.

 

New Tax Regime: Deductions and Exemptions 

The implementation of the New Tax Regime has brought about significant alterations to tax exemptions and deductions. This table will help you understand the deductions that are covered and no longer covered in the new tax regime:

 

New Tax Regime
Deductions Covered	Deductions Not Covered
Income from Life Insurance	Leave Travel Allowance
Scholarship Income	House Rent Allowance
Leave Encashment on Retirement	Deductions available under Section 80TTA/TTB
Agricultural Income	Entertainment allowance deduction and professional tax (applicable to government employees)
Salaried individuals, pensioners, and family pensioners can avail of a standard deduction of INR 50,000 for the assessment year 2024-2025 and onwards	Standard deduction of INR 50,000 (previously available for salaried individuals until the annual year 2023-24)
Family pensioners can claim a deduction of INR 15,000 until the assessment year 2023-2024	Tax relief on interest paid on home loans for self-occupied or vacant property under section 24
Voluntary Retirement Scheme (VRS) proceeds of up to INR 5 lakhs remain exempt from income tax	Tax-saving investment deductions under Chapter VI-A (80C, 80D, 80E, 80CCC, 80CCD, 80DD, 80DDB, 80EE, 80EEA, 80EEB, 80G, 80GG, 80GGA, 80GGC, 80IA, 80-IAB, 80-IAC, 80-IB, 80-IBA) (with the exception of deduction under Section 80CCD(2), 80JJA, and 80CCH)
Death cum Retirement Benefit	Retrenchment compensation

 

Old vs. New Tax Regime – Which one is better for you?

 

If you’re still unclear about which tax regime is better suited for your financial situation, have a look at these tax calculations to evaluate better-

 

If your total deductions are less than or equal to INR 5 lakhs, the new tax regime should likely be more beneficial for you. Even as the new tax regime does not offer any specific deductions and exemptions, it has lower tax rates as compared to the old tax regime and can help offset a majority of this loss.

 

If your total deductions are more than INR 3.75 lakhs, choosing the old tax regime is likely to be more advantageous in this position. As the old tax regime allows you to avail of several deductions and exemptions, it has the potential to significantly reduce your taxable income and lower your overall tax liability.

 

If your total deductions fall between INR 1.5 lakhs to INR 3.75 lakhs, deciding between the old and new tax regimes becomes a more complex affair. When your tax deductions fall within this range, your taxable income play depends purely on your income level and the specific deductions and exemptions you qualify for. To determine which tax regime is better suited for you, we recommend conducting a comprehensive evaluation based on your situation by using an income tax calculator from a reliable source.

 

Also Read: New Tax Regime vs. Old Tax Regime: Know the Difference & Effect on Home Loan

 

The Final Call: Old Vs. New Tax Regime

Before you make a decision depending on your individual circumstances and financial goals, here are some key differences to consider

 

1. Tax Rates: The new tax regime has introduced lower tax rates as compared to the old regime. This will help individuals with higher income levels to enjoy lower tax liabilities.  

 

2. Exemptions and Deductions: Under the old tax regime, taxpayers have the opportunity to benefit from a range of exemptions and deductions, including HRA, LTA, standard deductions, as well as deductions under Section 80C, 80D, and more. These deductions play a crucial role in reducing your taxable income. On the other hand, the new tax regime offers a simplified approach by not allowing most exemptions and deductions, leading to a streamlined tax structure.

 

3. Simplicity and Compliance: The primary objective of the new tax regime is to simplify the tax system and alleviate the compliance burden for taxpayers. By minimizing the number of exemptions and deductions, individuals can enjoy a more straightforward and hassle-free filing process.

 

4. Variability: In the old tax regime, taxpayers have the freedom to select and avail of relevant exemptions and deductions based on their specific financial circumstances. On the other hand, the new tax regime presents a uniform tax structure where taxpayers are not required to keep track of and claim multiple deductions.

 

5. Long-term Implications: When deciding between the old and new tax regimes, it is important to also take into account long-term tax planning. If the old regime offers substantial tax savings through exemptions and deductions, it could prove advantageous in the long run. Conversely, individuals with higher income levels may find the lower tax rates in the new regime more beneficial.

 

Determining the best tax regime is contingent upon factors such as income level, available exemptions, deductions, and individual financial objectives. It is advisable to assess your circumstances, consult a tax expert, or refer to the official tax guidelines for detailed information to be able to make an educated choice.

 

Also Read: Role of Financial Planning: ITR for a Business Loan

 

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