The amount of income tax you pay can be directly impacted by your decision between the Old vs New Tax Regime. In contrast to the new system, which offers lower and more widely distributed tax slabs with fewer deductions, the previous system offered a number of deductions and exemptions for investments, insurance, rent, and home loans. Many taxpayers may find the new system easier to understand and more advantageous, particularly those who do not make significant tax-saving investments. Nonetheless, the previous system can still be helpful to those who are claiming significant deductions.
Sharda Associates helps taxpayers compare both options based on their actual income, investments and deductions before selecting the suitable tax regime.
What Is the Difference Between the Old and New Tax Regime?
The biggest difference is the way taxable income is calculated.
By claiming qualified exemptions and deductions, taxpayers could lower their taxable income under the previous tax system. These could include house loan interest, health insurance, HRA, tax-saving investments, and other eligible costs.
The new tax regime, on the other hand, offers lower slab rates but does not permit many of the commonly used deductions available under the old regime. It is also the default tax regime, although eligible taxpayers can choose the old regime.
A quick comparison helps explain the difference:
| Old Tax Regime | New Tax Regime |
| More deductions and exemptions | Limited deductions |
| Higher traditional slab rates | Lower and wider tax slabs |
| Suitable when deductions are substantial | Often suitable when deductions are low |
| Requires more tax planning | Simpler tax calculation |
Under the current new-regime slab structure, income up to ₹4 lakh falls in the nil slab, followed by rates of 5%, 10%, 15%, 20%, 25% and 30% as income rises. A resident individual can also qualify for rebate on eligible normal income where taxable income does not exceed ₹12 lakh, subject to applicable conditions.
What Deductions Are Available Under the Old Tax Regime?
The main attraction of the old regime is the ability to claim several deductions and exemptions.
One of the most commonly used benefits is the deduction for specified investments and payments traditionally claimed under Section 80C, with an overall limit of ₹1.5 lakh. Eligible items can include PPF, eligible life insurance premiums, ELSS, certain fixed deposits, EPF contributions and qualifying principal repayment of a housing loan.
Taxpayers can also claim an additional deduction of up to ₹50,000 for eligible NPS contributions, subject to the applicable conditions.
Health insurance premiums can qualify for deduction. The limit generally depends on whether the insured persons are below or above the senior-citizen age threshold. Current filing rules retain limits of ₹25,000 in regular cases and ₹50,000 where the relevant insured person is a senior citizen, subject to conditions.
Other popular benefits under the old regime include:
- House Rent Allowance exemption for eligible salaried employees
- Leave Travel Allowance, subject to conditions
- Interest on housing loan for a self-occupied house, subject to the prescribed limit
- Education-loan interest deduction
- Eligible donations
- Savings-account interest deductions in applicable cases
- Certain deductions relating to disability and specified medical treatment
Salaried employees under the old regime also get a standard deduction of ₹50,000 under the current framework applicable to the relevant return years.
The old regime can therefore remain attractive where the taxpayer has a home loan, pays substantial rent, invests regularly in tax-saving products and incurs eligible insurance or other deductible expenses.
What Tax Benefits Are Available Under the New Tax Regime?
The new regime focuses more on lower tax rates and simplicity rather than providing a large number of deductions.
The current slab structure is:
- Up to ₹4 lakh – Nil
- ₹4 lakh to ₹8 lakh – 5%
- ₹8 lakh to ₹12 lakh – 10%
- ₹12 lakh to ₹16 lakh – 15%
- ₹16 lakh to ₹20 lakh – 20%
- ₹20 lakh to ₹24 lakh – 25%
- Above ₹24 lakh – 30%
Subject to the relevant rebate conditions, qualified resident individuals may receive no tax on qualifying normal taxable income up to ₹12 lakh under the new regime. Additionally, salaried taxpayers receive a standard deduction of ₹75,000, which may make the new system especially appealing to workers with few additional deductions.
Even under the new system, some deductions are still made. For instance, under the relevant laws, qualifying employer payments to NPS may still be subject to tax treatment.
However, under the new system, popular deductions including interest on a self-occupied home loan, regular 80C investments, health insurance deductions, and HRA exemptions are typically not available in the same manner.
Old vs New Tax Regime: Which Is Better?
There isn’t a single system that works better for all taxpayers.
Assume that two individuals each make ₹15 lakh annually.
The first individual does not claim HRA, lives in their own home, has no home loan, and makes little tax-saving investments. Because the lower slab rates can improve tax efficiency without necessitating investments just for tax savings, the new regime might be more advantageous.
The second individual has an eligible home loan, pays health insurance premiums, makes significant rent payments, claims HRA, and contributes ₹1.5 lakh to eligible investments. Because deductions drastically lower taxable income, the previous system might become competitive for this individual.
Therefore, taxable income after all legitimate deductions—rather than just gross salary—should be the basis for the proper comparison.
How Do You Choose the Right Tax Regime?
Determine the deductions you might legitimately make under the previous system by starting with your total yearly income.
Add things like qualified investments, health insurance, interest on a home loan, and contributions to the HRA and NPS.
Once these deductions have been reduced, compute tax under the previous system.
Next, use the appropriate lower slabs and allowed deductions, like the salaried standard deduction, to calculate tax under the new regime.
Examine the ultimate tax obligation using the two approaches.
Just because an investment offers a tax deduction doesn’t mean you should buy it. Instead than pressuring you to invest in an inappropriate product, tax planning should help you achieve your financial objectives.
Taxpayers without business or professional income generally have greater flexibility to choose between regimes from year to year. Taxpayers with business or professional income are subject to more restrictive rules regarding opting out of and re-entering the default regime, so the choice should be made more carefully.
Common Tax Regime Questions
A common question is whether the new regime is compulsory. It is not compulsory for eligible taxpayers, although it is the default regime.
Another common misunderstanding is that the new regime has no deductions at all. Some benefits remain available, including the applicable standard deduction for salaried taxpayers and eligible employer contribution to NPS.
Taxpayers also often assume that the old regime is automatically better if they invest under tax-saving provisions. That is not always true. Even after deductions, the old-regime tax may still be higher because its slab structure differs.
The best approach is to calculate tax under both regimes using actual figures before filing the return.
Conclusion
The choice between the Old and New Tax Regime depends on an individual’s income, eligible deductions, exemptions, investments, and overall tax planning. The New Tax Regime generally offers simpler taxation with fewer deductions, while the Old Tax Regime can be beneficial for taxpayers who claim substantial eligible deductions and exemptions.
There is no single regime that is better for everyone. Taxpayers should compare their taxable income, available deductions, investments, and final tax liability under both regimes before making a decision.
The best approach is to choose the regime that results in a lower overall tax burden while fitting your financial planning needs. Tax rules and thresholds can change, so the comparison should be made using the provisions applicable to the relevant assessment year.
Sharda Associates helps individuals and businesses with income tax planning, return filing, and financial guidance to evaluate their tax position and make informed decisions based on applicable tax provisions.
Call us now at 8989977769 for experienced advice.
Frequently Asked Questions
Q1. Is the new tax regime compulsory?
No. The new regime is the default regime, but eligible taxpayers can opt for the old regime subject to the applicable procedure.
Q2. Can I claim 80C in the new tax regime?
The commonly claimed 80C deduction is generally not available when calculating income under the new regime.
Q3. Is HRA available under the new regime?
The regular HRA exemption available under the old regime is generally not available under the new regime.
Q4. What is the standard deduction under the new regime?
For eligible salaried taxpayers, the standard deduction is ₹75,000 under the current framework.
Q5. Is there a standard deduction under the old regime?
Yes. Eligible salaried taxpayers can claim a standard deduction of ₹50,000 under the old regime for the applicable period.
Q6. Is the old regime better for home-loan borrowers?
It can be, particularly where the taxpayer is eligible for housing-loan interest deductions along with other substantial deductions. However, both regimes should still be compared before deciding.
Q7. Can I change my tax regime every year?
Taxpayers without business or professional income generally have more flexibility to change their choice each year. Different restrictions apply to taxpayers earning business or professional income.
Q8. How can Sharda Associates help?
Sharda Associates can help taxpayers compare their income, investments, deductions, home-loan benefits and other eligible claims under both regimes. A proper tax comparison before filing the return can help select the regime that results in lower lawful tax liability while keeping overall financial planning in mind.