Which Tax Regime to Choose?

Individuals who earn an income are expected to pay taxes as per prevailing tax laws. The income tax liability of an individual depends on the tax slab applicable to them as per Income Tax Act, 1961. The income tax is levied on the annual income of the tax payer and the tax rate may increase as taxable income increases, subject to the provisions of Income Tax Act, 1961 (the Act). Another major criterion that determines the amount of tax you may have to pay is the tax regime you have chosen¹.

For the uninitiated, the current tax system in India offers taxpayers the option to select between two tax regimes, simply called the old tax regime and the new tax regime. The latter has been made the default tax regime in Budget 2023 by the Finance Minister of India, with taxpayers having the option of choosing the old tax regime if they wish. ^[1][5]

The simultaneous presence of the two regimes may make one wonder, “Which tax regime to choose?” or “How to decide which tax regime is better?” The answers may be a bit complex. A thorough understanding of each tax regime as well as your own tax-related priorities and financial decisions may be important to get to the answer.

Understanding the Old Tax Regime ^[1]

First, let us understand the old tax regime. To begin with, let’s look at the tax slab rates applicable for different income brackets under this regime:

These rates are applicable for individuals under the age of 60 years and HUFs (Hindu Undivided Family).

Senior citizens having the question, “Which tax regime should I choose?” may be glad to know that the tax rates are different for them under the old tax regime. For individuals over the age of 60 years but below the age of 80 years, the basic exemption limit is up to Rs.3 lakhs. Senior citizens with an annual income in the range of Rs 3 lakhs to Rs 5 lakhs may be liable to pay tax at the rate of 5%. The tax rates may be similar to those in the above table for people in income ranges higher than Rs 5 lakhs. ^[1]

For super senior citizens (those over 80 years of age), Rs 5 lakhs is the basic exemption limit. Other income tax slab rates remain same.

Understanding the New Tax Regime^[1][5]

With amendments being introduced in the new tax regime in Budget 2023, let’s take a brief look at the tax slabs under it so that you may decide which regime to choose.

Furthermore, the new tax regime offers tax rebates on income up to Rs 7 lakhs. Thus, if your taxable income is below Rs 7 lakhs, you may not have to pay tax under the new tax regime.^[5][6]

These tax rates are applicable to individuals of all age groups. Thus, senior citizens and super senior citizens do not have an increased basic exemption limit to reduce their taxability.

Comparing the Old and New Tax Regimes

The tax slabs for the two regimes differ to a certain extent. However, any individual wondering, “Which tax regime should I choose?” may find it better to look at other factors, too.

To get a better idea of those factors, let us look at the deductions and exemptions permitted under each regime.

Deductions and exemptions allowed under the old tax regime: ^[1]

• Standard deduction on salary
• House Rent Allowance (HRA)
• Leave Travel Allowance (LTA)
• Relocation Allowance
• Children’s education allowance
• Miscellaneous allowances as specified in Section 10 (14)
• Conveyance allowance
• Deductions allowed under Section 80C, 80CCC, 80CCD, 80D, 80DD, 80DDB, 80E, 80EEA, 80EEB, 80G, 80GG, and much more {with the exclusion of Section 80CCD (2)} ^[2]

Section 80C, specifically, may provide substantial tax benefits to persons looking to reduce their tax liability. Section 80C allows deductions of up to Rs 1.5 lakhs against a variety of contributions and investments made towards different financial products. For instance, one can claim this deduction against the premium they may pay for their life insurance policy^[3] among other investment avenues available under sec 80C of the Act. Moreover, you may get an additional deduction of up to Rs 25,000 under Section 80D if you have opted for a critical illness insurance rider with your life insurance policy^[4].

One may use an income tax calculator to get an estimate of their tax liability, keeping in mind the various deductions and exemptions available.

Tax exemptions retained under the new tax regime:

• Agricultural income
• Standard deduction on rent under Section 24
• Retrenchment compensation
• Retirement leave encashment
• Money received for educational purposes via a scholarship, etc.^{[1] [2]}

Budget 2023 has introduced the standard deduction on salary under the new tax regime as well, which was previously available solely under the old regime. Individuals with a salary of Rs 15.5 lakhs or more may save Rs 52,500 under the new tax regime due to this deduction^[5][7].

Taxpayers under the new tax regime may not be able to claim Section 80C deductions against their various investments or financial contributions (including life insurance premiums). However, they can claim exemption of maturity benefit under Section 10 (10D) under the new tax regime as it allows for the same^[2].

It is important to note that to claim any tax benefits, whether under the old tax regime or the new one, one must meet the various terms and conditions specified in the relevant sections of the Act. One must also keep in line with the latest amendments in tax laws as tax benefits are subject to change in tax laws.

Which Tax Regime Should You Choose? ^[1]

As mentioned earlier, there are many considerations one must keep in mind to choose the right regime.

The old tax regime may be helpful to those who tend to make multiple investments, have insurance policies, live in rented accommodation, or have taken loans, since the old tax regime may provide tax benefits against the payments made for these purposes.

Individuals who may have low investments or may have purchased fewer products that may help save tax may find it preferable to opt for the new tax regime. Individuals with a taxable income of under Rs 15 lakhs may also find the new tax regime to be beneficial since the tax rates are comparatively lesser in the category^[1][5].

However, one must not only look at their present income but also their future considerations before deciding which tax regime to choose.

Examples:

a) 25-year-old Rishi earns an annual income of Rs 12 lakhs. However, as of now, he has not made any major investments in tax-saving schemes and was wondering which tax regime to choose. He has a term insurance policy for which he pays a premium of Rs 7000 every month. He used an income tax calculator to compute his taxable income. Despite the term insurance tax benefits and HRA exemption, he found that his tax liability was higher under the old tax regime since he incurred an overall higher tax rate on his income under the old tax regime.

So, he chose the new tax regime to reduce his overall tax outgo.

b) On the other hand, 30-year-old Disha, who earns Rs 10 lakhs a year, found the old tax regime to be a better option for her because she had made investments in several tax-saving schemes & she is also claiming HRA deduction of Rs. 120,000 for year. She had a life insurance policy for herself and her parents with a premium of Rs 100,000 and a critical illness rider with an additional premium of Rs 10,000. So, she chose the old tax regime since it gave her multiple tax deductions despite incurring a higher tax rate.

Conclusion

Ultimately, there is no objective answer on how to decide which tax regime is better, because each regime may be beneficial to you over the other depending on various factors. You may want to put forth your queries and doubts to a tax professional to help you get better guidance on which tax regime you should choose.

References:

¹https://cleartax.in/s/income-tax-slabs

² https://groww.in/blog/old-vs-new-tax-regime-which-is-better

³ https://cleartax.in/s/life-insurance-taxability

⁴ https://cleartax.in/s/medical-insurance

⁵ https://cleartax.in/s/income-tax#:~:text=Income%20Tax%20Department.-,What%E2%80%99s%20New%20in%20Income%20Tax,-Budget%202023%20Updates

⁶ https://cleartax.in/s/budget-2023-highlights#:~:text=Highlights%3A%20Direct%20Tax-,Changes%20in%20New%20Tax%20Regime,-The%20new%20tax

⁷ https://pib.gov.in/PressReleasePage.aspx?PRID=1895286#:~:text=Each%20salaried%20person%20with%20an%20income%20of%20Rs.%2015.5%20lakh%20or%20more%20will%20thus%20stand%20to%20benefit%20by%20Rs.%2052%2C500/%2D.

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