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Old Tax Regime vs New Tax Regime: Who should opt? How is it Beneficial?
Debates started to surface three years ago when the Government introduced a new tax regime in Budget 2020, keeping the old one parallelly in force. Budget 2023 contributed further changes in the new one, creating a fresh lease of confusion over which of the regime is more profitable. To understand which one suits whom, it’s important to get clarity on their basic frameworks.
The New Regime
The new regime exempts incomes up to Rs 3 lakh annually while the tax rebate is now available for annual incomes up to Rs 7 lakh. Although certain deductions from the old regime are yet not available in the new one, benefits have been increased to lure more taxpayers.
The Old Regime
The threshold income for claiming tax rebates is Rs 5 lakh with a wide set of exemptions and deductions. The most popular is the deduction of up to Rs 1.5 lakh per annum under section 80C, which applies to savings plans, term plans, retirement plans, ULIP plans, fixed deposits etc. To opt for the best tax savings options, one can always choose to buy the term plan online, pick the best pension plan in India, or look for the most lucrative ULIP tax benefit.
The tough choice
Ideally one should choose the regime that makes them eligible for higher deductions and lower tax payments. For that, let’s start at a common point of equal tax liability. Now, if the total deductions and exemptions at your income level are higher than that point of equality, staying in the old regime is profitable. If not, shifting to the new one is a better bet.
Going by calculations,
- If the total deductions are Rs 1.5 lakh or less, switch to the new tax regime.
- The old regime is profitable if the total deductions exceed Rs 3.75 lakh per annum
- With total deductions in the range of Rs 1.5 lakh – Rs 3.75 lakh, income should be the deciding parameter.
Benefits for comparison
It’s worth noting the respective benefits while comparing tax regimes. The new one will fetch you these advantages.
- Higher tax rebate limit at Rs 7 lakh per annum.
- The threshold annual income for exemption increased to Rs 3 lakh.
- Standard deduction of Rs 50,000 is now available.
- For incomes above Rs 5 crore per annum, the surcharge rate is down to 25% from 37%, reducing effective tax rate.
- The lower of 1/3 of the family pension or Rs 15000 can be claimed for deduction.
- Leave encashment exemption limit for non-Govt employees raised to Rs 25 lakh
- New tax regime is now the default option.
Meanwhile, the old tax regime comes with its usual benefits:
- More than 70 exemptions and deductions are available
- Deduction claims include HRA and LTC.
- A standard deduction of Rs 50,000 is available.
- Tax Rebate Limit is Rs 5 lakhs per annum.
Comparisons done. Now all you need is to take your pick wisely!
Related Articles:
- Budgeting Techniques for a Smooth Transition into Retirement
- What is FIRE Method and How Does it Work?
- Pension Planning for the Self-Employed
- Build a Secure Future with an Investment Plan for 25 Years
- Difference between Section 80C and 80CCC
- Income Tax Slabs FY 2023-24
ARN- INT/ED/08/23/3877
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Francis Rodrigues
Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.
Written By:
HDFC Life
Reviewed by Life Insurance Experts
HDFC LIFE IS A TRUSTED LIFE INSURANCE PARTNER
We at HDFC Life are committed to offer innovative products and services that enable individuals live a ‘Life of Pride’. For over two decades we have been providing life insurance solutions - protection, pension, savings, investment, annuity and health.
# The above stated exemptions/deductions and tax benefits are subject to the provisions & conditions mentioned in the existing Income Tax Act, 1961. Tax Laws are also subject to change from time to time.
# It is requested to seek tax advice of your Chartered Accountant or personal tax advisor with respect to your personal tax liabilities under the Income-tax law.
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