General Budget 2023: Old Tax Vs. New Tax Regime- Which one is Better?

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Old Tax Vs. New Tax Regime: With the announcement of Budget 2023-24, Finance Minister Nirmala Sitharaman has said she is making new tax regime as default regime. However, citizens will have option to avail the benefit of old tax regime.

General Budget 2023: Old Tax Vs. New Tax Regime
General Budget 2023: Old Tax Vs. New Tax Regime

The amount of taxes you pay is likely to change ahead. Finance Minister Nirmala Sitharaman in her budget speech has made key major announcements for hard-working middle-class citizens who pay taxes. These are called new income tax slabs and the Centre has decided to make it a default tax regime. However, the old income tax slabs regime has not been abolished as well. Instead, taxpayers now have the option between the two regimes when paying for their taxes. But which one is better?

What is the new income tax slabs regime?

Firstly, FM cleared the air over the rebate on an income of ₹5 lakh which is free from taxes in both old and new tax regimes. This will change ahead!

Sitharaman has proposed to make the exemption limit to ₹7 lakh under the new tax regime — which means that up to this income amount a taxpayer will not be required to pay any tax.

Further, she proposed of change the tax structure in this regime by reducing the number of slabs to five and increasing the tax exemption limit to ₹3 lakh.

Hence, the new tax rates are:

  • Income slab of ₹3 lakh: No tax levied
  • Income of ₹3 lakh to ₹6 lakh: 5% tax rate
  • Income of ₹6 lakh to ₹9 lakh: 10% tax rate
  • Income of ₹9 lakh to ₹12 lakh: 15% tax rate
  • Income of ₹12 lakh to ₹15 lakh: 20% tax rate
  • Above ₹15 lakh income: 30%.

Additionally, the FM has proposed to reduce the surcharge rate from 37% to 25% on the highest tax rate in the country of 42.74% — which is among the highest in the world. With the reduction in the surcharge rate, the maximum rate would be 39%.

Also, FM proposed to extend the benefit of the standard deduction to the new tax regime. Each salaried person with an income of ₹15.5 lakh or more will thus stand to benefit by ₹52,500.

But FM also said, “we are also making the new income tax regime as the default tax regime. However, citizens will continue to have the option to avail the benefit of the old tax regime.”

What are old income tax slabs?

The old tax regime have following tax slabs which have been opted by many citizens instead of announcement of new tax regime in previous year.

  • Income up to ₹2.5 lakh: Exempted from tax
  • Income of ₹2.5 lakh to ₹5 lakh: 5% tax rate
  • Income of ₹ ₹5 lakh to ₹7.5 lakh: 15% tax rate
  • Income of ₹7.5 lakh to ₹10 lakh: 20% tax rate
  • Income of above ₹10 lakh: 30% tax rate

Which one is better?

Before understanding which is a better regime, you need to first understand which factors will be taken into consideration for calculation of income tax amount.

According to India’s leading tax and financial services software platform, Clear’s calculation, without any deduction claims, the new tax regime is beneficial. A taxpayer saves more taxes under the new tax regime. It needs to be noted that this would be without any deductions that are available in old regime.

Also Read General Budget 2023: Income Tax Exemption Limit Increased from Rs 5 lakh to Rs 7 lakh, Finance Minister gave Statement

In the older regime, a tax rebate is applicable till income of ₹5 lakh under section 87A of the IT Act. The maximum rebate comes to around ₹12,500. Now, this rebate is added to income tax payable above ₹5 lakh. Hence, only the income class of ₹5 lakh salary, does not pay any taxes.

Examples:

For example, Mr. XYZ has a salary of ₹10 lakh and decided to choose the old tax regime. Let’s suppose, tax deductions under sections 80C, 80D, and 24 (b) cumulatively come to around ₹2.5 lakh. Taking into consideration the deduction amount, the taxable amount is around ₹7.5 lakh ( ₹10 lakh minus ₹2.5 lakh tax benefits).

Tax amount on income of ₹7.5 lakh:

Till ₹2.5 lakh income: Nil Tax

Income tax slab between ₹2.5 lakh to ₹5 lakh: 5% tax rate on ₹2.5 lakh (the difference between ₹2.5 to ₹5 lakh) which comes to around ₹12,500

Income tax slab between ₹5 lakh to ₹10 lakh: 20% tax rate is levied on the remaining ₹2.5 lakh, taking the amount to ₹50,000

Taking the above into consideration, the tax amount that needs to be paid would be ₹62,500 ( ₹12,500 + ₹50,000).

But if deductions are not included in the old regime:

– Till income of ₹2.5 lakh, no tax will be levied.

– ₹12,500 tax between income bracket of ₹2.5 lakh to ₹5 lakh

– 20% levied on the remaining ₹5 lakh which falls under the income tax bracket of ₹5 lakh to ₹10. The tax amount here comes to around ₹1 lakh.

Taking these into consideration, the tax payable amount would be ₹1,12,500 in the old regime.

Under the revised new tax regime: 

Taking the same example into consideration, the taxable amount will be ₹10 lakh.

– ₹0 to ₹3 lakh: No Tax

– ₹3 lakh to ₹6 lakh: Tax rebate of ₹15,000 (5% under section 87A)

– ₹6 lakh to ₹9 lakh: 10% tax rate which leads to ₹30,000

– ₹9 lakh to ₹12 lakh slab: The remaining ₹1 lakh amount falls under this bracket, hence, the tax amount here would be ₹15,000

The tax amount payable would be ₹60,000 ( ₹15,000 + ₹30,000 + ₹15,000) in the new revised regime.

Hence, without the tax deduction amount claimed, the new regime is much better for taxpayers to save on taxes. But if deductions are included, then old regime is more beneficial.

For example: If your salary comes to around ₹20 lakh. Under this salary income, the highest tax rate of 30% is same for both new and old regime, however, the tax amount varies. 

Old regime:

Under the old regime, without claiming tax deduction benefits, here’s how your tax amount will be.

  • Income till ₹2.5 lakh: No tax
  • Tax on income slab from ₹2.5 lakh to ₹5 lakh: ₹12,500 payable (5% of ₹2.5 lakh).
  • Tax on income slab from ₹5 lakh to ₹10 lakh: Tax amount to come around ₹1,00,000
  • Above ₹10 lakh: 30% levied on the remaining amount of ₹10 lakh – the amount comes to around ₹3,00,000.

The tax payable amount is ₹4,12,500 ( ₹12,500 + ₹1 lakh + ₹3 lakh) on a salary of ₹20 lakh in the old regime.

New revised regime:

  • Same example:- No tax till ₹3 lakh
  • ₹15000 between income slab of ₹3 lakh to ₹6 lakh (5%)
  •  ₹30,000 between income tax slab of ₹6 lakh to ₹9 lakh (10%)
  •  ₹45,000 between income slab of ₹9 lakh to ₹12 lakh (50%)
  •  ₹60,000 between income slab of ₹12 lakh to ₹15 lakh (20%)
  • ₹1,50,000 on above ₹15 lakh (30% on ₹remaining ₹5 lakh)
  • The total tax payment comes to around ₹3 lakh ( ₹15,000 + ₹30,000 + ₹45,000 + ₹60,000 + ₹1.5 lakh).
  • Similar is the case with other income salaries. 

From the above it can be seen that individuals earning salaries upto ₹7 lakh are biggest beneficiary in new regime. 

“Taxpayers who want to avoid the hassles of claiming traditional deductions, who usually do not opt for HRA or claim other reimbursements via an employer or do not want to invest in traditional 80C, may now see the new regime as an option.

“Taxes are lower yet old regime may still play out better for taxpayers, all depends on how well structured their CTC is, to allow for reimbursements and claims and how well they can maximize the exemptions available to them. Nevertheless, the messaging is clear, the government is aiming to move towards the new tax regime.”

FAQ- New Tax Regime Vs. Old Tax Regime

Ques: Which tax regime is better old or new?

Ans- Old vs new income tax regime: Those who claim less than ₹3.75 lakh exemption will save money in the new tax regime, a ministry official explained. “So, a taxpayer who claims deductions less than ₹3.75 lakh while filing the annual I-T returns will be advised to opt for the new tax regime as declared in the Budget.

Ques: What is the benefit of new tax regime?

Ans: The new tax regime was announced for individuals who were unable to claim the benefits of the deductions and tax exemptions available. It also helps to ease the compliance burden for the salaried taxpayers. Currently, the new tax regime offers 6 tax slabs and lower tax rates as compared with the old income tax regime.

Ques: What is the drawback of new tax regime?

Ans: Deductions of leave travel. House rent allowances deductions. Many special allowances will now no longer have deductions such as children education allowance, hostel allowance, uniform allowance and many more. No deductions on allowances to MPs/MLAs.

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