Old income tax regime vs new income tax regime: Which one is better?

New income tax regime: The taxpayers can avail of several deductions under the old income tax regime using section 80C etc. But under the new tax regime, no such deductions are allowed

Finance Minister Nirmala Sitharaman introduced a slew of changes to the new income tax regime in the Budget 2023. The rebate limit for individual taxpayers has been raised from Rs 5 lakh per annum to Rs 7 lakh per annum. Moreover, the new tax regime has been made the default regime for taxpayers.

"Currently, those with income up to Rs 5 lakh do not pay any income tax in both old and new tax regimes. I propose to increase the rebate limit to Rs 7 lakh in the new tax regime. Thus, persons in the new tax regime, with income up to Rs 7 lakh will not have to pay any tax," Sitharaman said.

Moreover, a new tax structure was introduced with an exemption limit of Rs 3 lakh per annum.

"I had introduced, in the year 2020, the new personal income tax regime with six income slabs starting from Rs 2.5 lakh. I propose to change the tax structure in this regime by reducing the number of slabs to five and increasing the tax exemption limit to Rs 3 lakh," she said.

She said that the taxpayers will continue to get an option to choose the old regime if they want to.

How is the new tax regime different from the old tax regime?

The taxpayers can avail of several deductions under the old income tax regime using section 80C etc. However, under the new tax regime, no such deductions are allowed. The main idea behind this, according to experts, is that the Centre wants to simplify the income tax filing process.

In the new tax regime, the taxpayer also cannot avail of popular exemptions like leave travel allowance (LTA), house rent allowance (HRA), children's education allowance, and standard deduction on salary.

Moreover, the tax slabs are also different. They can be viewed here:

Tax (in %)

Old Tax Regime Income

New Tax Regime Income(Existing)

New Tax Regime (Proposed in Budget 2023

0 Up to Rs 2.5 lakh Up to Rs 0-2.5 Up to Rs 3 lakh 5 Rs 2.5-5 lakh Rs 2.5-5 lakh Rs 3-6 lakh 10 - Rs 5-7.5 lakh Rs 6-9 lakh 15 - Rs 7.5-10 lakh Rs 9-12 lakh 20 Rs 5-10 lakh Rs 10-12.5 lakh Rs 12-15 lakh 25 - Rs 12.5-15 lakh - 30 More than Rs 10 lakh More than Rs 15 lakh More than Rs 15 lakh

According to law, if a taxpayer chooses to pay the income tax under the new tax regime, they still have the option to switch back to the old regime. However, this is available only once in a lifetime for the salaried.

Which regime is better?

The slabs under the old regime have not been changed in the budget.

Under the old regime, if the income of a taxpayer is Rs 9 lakh per annum, they can use all the deductions and bring the taxable income to Rs 5 lakh and bring their tax liability to Rs 0. But under the new regime, they will be liable to pay Rs 45,000 tax.

However, as the income rises, taxpayers will have to pay a lower tax under the new regime as there are more slabs.

The old regime looks more lucrative for people who have more long-term investments. But for people who do not have a housing loan or long-term tax saving schemes, the new regime looks better.

According to Nitin Baijal, Director, Deloitte India, "As was the expectation from the time of introduction of the simplified tax regime, the government has tweaked the simplified regime to bring it at par with the old regime. The slab rates have been tweaked which provides relief to salary taxpayers from the administrative inconvenience caused by claiming deductions and exemptions under the old regime. Now a person earning an income of Rs 15,00,000 will prefer the simplified regime if his overall exemptions and deductions including standard deduction are lower than Rs 4,08,300. The government has now tried to make the new regime as a simplified regime."