Old Vs New Tax Regime: Which is Better?

The Indian tax area has evolved with the introduction of the new tax regime in the 2020 budget. This presents taxpayers with a crucial decision: remain anchored in the familiar territory of the old regime or explore the potentially lower tax burdens offered by the new one.

This blog will delve deeper into old vs new tax regime, considering different income groups and scenarios. By the end, you’ll be equipped to identify the regime that minimizes your tax liability and maximizes your after-tax income.

New Tax Regime

Introduced in the 2020 budget, the new tax regime offers a simpler approach to filing with lower tax rates. However, it comes with a catch: you forfeit the deductions and exemptions available under the old regime. This means you can’t claim popular tax benefits like investments under Section 80C (PPF, ELSS mutual funds), medical insurance premiums (Section 80D), or charitable donations (Section 80G).

The choice between the regimes becomes a balancing act. While the new regime offers lower tax rates, you might miss out on valuable tax savings on essential expenses and long-term investments.

To make an informed decision, carefully consider your income, existing deductions you utilize, and your financial goals. Analyze if the new regime’s lower tax rates outweigh the loss of deductions from your current strategy. Consulting a tax advisor can be helpful in navigating this decision.

Old Tax Regime

The old tax regime offers a more traditional approach to taxation. Unlike the new regime, it allows taxpayers to claim various deductions and exemptions scattered throughout the Income Tax Act. These deductions significantly reduce your taxable income, thereby lowering your tax liability. Common examples include claiming benefits for rent (HRA), travel (LTA), and medical insurance premiums (Section 80D). Additionally, investments in specific instruments like PPF, ELSS mutual funds, and ULIPs under Section 80C qualify for tax deductions. This regime is ideal for individuals who heavily rely on these deductions to minimize their tax burden. However, it’s important to note that claiming these deductions often involves maintaining detailed records and performing complex calculations, potentially making tax filing more intricate.

Breakeven Threshold of New vs Old Tax Regime for Salaried Employees, Which Regime to Choose?

The decision between the old vs new tax regime depends on your individual circumstances, particularly the total deductions you can claim as a salaried employee. Here’s a breakdown to help you understand this critical choice:

If You Have Salary Income

Salary earners, your tax regime choice hinges on deductions. With minimal deductions (less than ₹1.5 lakhs), the new regime’s lower rates might be better, especially if HRA is your main one. For high deductions (over ₹3.75 lakhs) on investments or home loans, the old regime offers a likely lower tax burden. If you fall in the grey area between ₹1.5-₹3.75 lakhs deductions, consider both regimes (calculators or tax advisor) and weigh the tax savings against potential impacts on your long-term financial goals.

If You Have Income Other than Salary

For those with income beyond salary (business, rentals), choosing a tax regime gets trickier. The new regime’s simplicity might be tempting, but seeking a tax advisor’s advice is crucial. They can analyze your deductions, income types, and recommend the regime that minimizes your total tax liability across all income sources. While the old regime offers wider deductions for all income, its complexity persists. Consulting a tax advisor becomes even more important to maximize your after-tax income in such scenarios.

Tax under Old vs New Regime

The comparison between old vs new tax regime becomes crucial when assessing the tax implications at different income levels and deduction scenarios.

When Total Deductions are ₹1.5 Lakhs or Less: The New Tax Regime will be Beneficial

Salary earners with minimal deductions (under ₹1.5 lakhs), particularly those relying on House Rent Allowance (HRA), should favor the new tax regime. Its lower tax rates likely outweigh the standard deduction, simplifying filing and potentially minimizing your tax outgo.

When Total Deductions are More than ₹3.75 Lakhs: The Old Tax Regime will be Beneficial

Conversely, if deductions exceed ₹3.75 lakhs, sticking to the old tax regime is typically more advantageous, as it allows taxpayers to avail of a wider range of deductions and exemptions.

When Total Deductions are Between ₹1.5 Lakhs to ₹3.75 Lakhs: Will Depend on Various Income Levels

Consider using online tax calculators or consulting a tax advisor to compare your tax burden under both regimes. Remember, the new regime’s lower rates might be offset by lost deductions impacting your long-term financial goals (e.g., investments).

Comparison Between the Deductions & Exemptions Under the New and Old Tax Regime

The Indian government offers two tax regimes for individuals: the old tax regime and the new tax regime. Each regime has different rules regarding deductions and exemptions, which can significantly impact your final tax liability. Let us take a quick look at the deductions and exemptions under the new and old tax regime:

Old vs New Regime Example

Let us consider a hypothetical example to illustrate the difference in tax liability under the old and new tax regimes for individuals with varying income levels and deduction scenarios. A salaried professional with ₹10 lakhs annual income and ₹2 lakhs deductions (primarily HRA). Under the old regime, these deductions would lower their taxable income, potentially putting them in a lower tax bracket. However, calculations might be complex. On the other hand, the new regime’s lower tax rates can be beneficial despite the lack of deductions, offering a potentially simpler filing process. To make the best choice, they would need to calculate their tax liability under both regimes to see which minimizes their tax burden.

How to Choose Between Old and New Tax Regime?

Choosing between the old and new tax regime boils down to your deductions. If you claim minimal deductions (less than ₹1.5 lakhs) and rely heavily on HRA, the new regime’s lower tax rates might be better. However, the old regime offers a lower tax liability for those with substantial deductions exceeding ₹3.75 lakhs (investments, home loan interest). If your deductions fall between ₹1.5 lakhs and ₹3.75 lakhs, calculate your taxes under both regimes to see which minimizes your tax burden. Consulting a tax advisor for personalized advice is always recommended.

Old Tax Regime vs New Tax Regime, Which is Better?

The age-old question persists: which tax regime reigns supreme? The answer lies in the unique financial circumstances and goals of each taxpayer, as well as the trade-offs between lower tax rates and available deductions.

Key Takeaways

• The new tax regime is simpler with lower rates but forfeits most deductions, unlike the more complex old regime which allows various tax benefits.
• Minimal deductions (under ₹1.5 lakhs) favor the new regime, while high deductions (over ₹3.75 lakhs) make the old regime more advantageous.
• Choosing the best regime requires evaluating total deductions, income, and long-term financial goals to determine overall tax benefits.
• The old regime offers significant deductions like HRA and Section 80C but is complex; the new regime is straightforward but limits these tax-saving opportunities.
• Using tax calculators or consulting a tax advisor helps compare tax liabilities under both regimes for an informed decision.

Conclusion

The decision between the old and new tax regimes is not a one-size-fits-all proposition. Taxpayers must carefully evaluate their options based on their unique financial circumstances and long-term objectives. While the new tax regime offers lower tax rates, it comes with the trade-off of foregoing certain deductions and exemptions. The old tax regime allows taxpayers to avail of a wider range of deductions but may result in a higher tax liability. Ultimately, the choice boils down to striking the right balance between tax optimization and financial planning.

FAQs on Old vs New Tax Regime