OLD TAX REGIME VS NEW TAX REGIME

With the introduction of new tax regime in the Union Budget 2020 and its updation in Union Budget 2023, taxpayers were left with the option to choose between the old tax regime and the new tax regime. This has created ambiguity amongst taxpayers as to which regime would be beneficial for them. In this web log, we have discussed the tax regimes (old and new), thereby articulating the key differences between them which would enable the taxpayers to make better decision.

Old Tax Regime:

Under this regime, taxpayers can claim deductions and exemptions on their taxable income, which reduces their tax liability. Some of the popular deductions and exemptions available under the old tax regime are:

• Standard Deduction: A flat deduction of Rs. 50,000 is allowed from the taxable income for salaried individuals.

• House Rent Allowance (HRA): An exemption claimed by salaried individuals on the rent paid towards their accommodation, subject to certain conditions and limits as may be prescribed.

• Section 80C: This section allows a deduction of up to Rs. 1.5 lakh for investments made in instruments such as Public Provident Fund (PPF), National Savings Certificate (NSC), Equity Linked Saving Scheme (ELSS), etc.

• Section 80D: This section allows a deduction of up to Rs. 25,000 for medical insurance premium paid for self, spouse, and dependent children.

New Tax Regime:

The new tax regime is an alternate tax regime that was introduced in the Union Budget 2020. Under this regime, taxpayers cannot claim deductions and exemptions on their taxable income. Instead, the tax rates are lower, and taxpayers can pay taxes at the reduced rates without any deductions or exemptions. The new tax rates are:

Income tax rate comparison

Differences between the Old Tax Regime and the New Tax Regime:

The key differences are as under:

• Deductions and exemptions: Under the old tax regime, taxpayers can claim deductions and exemptions on their taxable income, while under the new tax regime, no deductions or exemptions are allowed.

• Tax Rates: The tax rates are different under both regimes. The old tax regime has higher tax rates, while the new tax regime has lower tax rates.

• Simplification: The new tax regime has simplified the tax structure, and taxpayers do not need to maintain any investment-related documents to claim deductions and exemptions.

Which one is better for taxpayers?

The choice between the old tax regime and the new tax regime depends on individual preferences and financial situations. If you are someone who has invested in various financial instruments and is claiming deductions and exemptions under the old tax regime, then it might be better for you to continue with the old tax regime. On the other hand, if you are someone who does not have any investments and does not claim deductions and exemptions, then the new tax regime might be more beneficial for you.

Conclusion:

The choice between the old tax regime and the new tax regime depends on individual preferences and financial situations. While the new tax regime has simplified the tax structure and has lower tax rates, the old tax regime allows taxpayers to claim deductions and exemptions on their taxable income. Therefore, it is essential to weigh the pros and cons of both regimes before making a decision. Additionally, taxpayers may consult a tax expert or financial advisor to make an informed decision.