Difference Between Old and New Tax Regime

The introduction of the new tax regime under Budget 2020 brought significant changes to income tax calculations for individuals. With different tax rates and exemptions, taxpayers in India now have the choice between the old vs new tax regime. Understanding the key differences can help you make an informed decision about which regime suits your financial situation.

Overview of the Old Tax Regime

The old tax regime is the traditional system where taxpayers can claim exemptions and deductions to reduce taxable income. It includes benefits like:

• Standard deduction of ₹50,000
• Section 80C deductions up to ₹1.5 lakh for investments in life insurance, PPF, ELSS, etc.
• Additional deductions under Sections 80D, 80E, and 24(b).

The old regime encourages investments in tax-saving instruments but involves higher tax rates.

Overview of the New Tax Regime

The new tax regime offers lower tax rates but removes most exemptions and deductions. It is designed to simplify tax calculations and appeal to individuals who prefer straightforward taxation without the need to invest in specific instruments.

Tax Slabs Comparison

Key Differences Between the Old and New Regime

• Exemptions and Deductions:
  • Old Regime: Allows multiple exemptions like HRA, LTA, and deductions under Sections 80C, 80D, and 80E.
  • New Regime: Removes almost all exemptions and deductions, including life insurance benefits.
• Tax Rates:
  • Old Regime: Higher tax rates with opportunities to reduce taxable income.
  • New Regime: Lower tax rates with no deductions.
• Complexity:
  • Old Regime: Requires investment planning and documentation for exemptions.
  • New Regime: Simple and straightforward without investment-linked savings.

Who Should Choose the Old Regime?

• Individuals who invest in tax-saving instruments like PPF, ELSS, or life insurance plans.
• Those with significant deductions such as home loan interest, medical insurance, or education loans.
• Salaried employees claiming HRA or other allowances.

Who Should Choose the New Regime?

• Individuals with minimal investments or expenses eligible for deductions.
• Those preferring lower tax rates without the need for tax-saving investments.
• People in higher income brackets without major financial commitments.

Using an Income Tax Calculator

To determine which regime is more beneficial, use an income tax calculator. By entering details about your income, exemptions, and deductions, you can compare the tax liability under both regimes.

Example:

Suppose your annual income is ₹10 lakh:

• Under the old regime, with deductions of ₹1.5 lakh (80C) and ₹50,000 (standard deduction), your taxable income is ₹8 lakh. The tax liability will be ₹52,500.
• Under the new regime, with no deductions, your tax liability will be ₹62,500.

In this case, the old regime is more tax-efficient due to available deductions.

Choosing between the old and new tax regimes depends on your financial habits, investment preferences, and income structure. Individuals with investments in life insurance plans and other tax-saving instruments may benefit from the old regime, while those seeking simplicity and lower rates might prefer the new regime. Use an income tax calculator to analyse your situation and select the regime that optimizes your tax savings.