Other BriefingsOld vs New Tax Regime in India: How to Choose the Right Tax Option
We provide an overview and comparison of the old vs new tax system in India and the proposed changes announced in the Union Budget 2023-2 to assist taxpayers in making an informed choice. It must be noted that the tax slabs and tax rates have not been unaltered under the old tax system as the government wants to make the new tax regime, first announced in Union Budget 2020-21, more appealing to the middle class.
During the Union Budget 2023-24 announcement on February 1, 2023, India’s federal finance minister Nirmala Sitharaman introduced major changes to the new income tax regime, available for taxpayers since FY21. The changes, which include lower tax rates and a tax rebate on income up to INR 700,000, will be applicable from April 1, 2023.
The old income tax regime, which allows for deductions like home loan interest payments, was not altered. Moreover, the new tax regime has been made the default personal tax structure though taxpayers can still opt for the old tax regime. The union budget announcements have set off speculation that the government could be planning to gradually transition taxpayers from the old tax regime to the new tax regime.
Following the budget release, taxpayers are uncertain as to whether the new income tax plan’s modifications make it more appealing than the old one.
In this article, we provide an overview of both tax regimes to help taxpayers make an informed choice. For assistance in devising an optimal tax strategy best suited to your custom income structure, contact our experts at india@dezshira.com.
New tax regime
Individual taxpayers are subject to tax under the Indian income tax system depending on the income or profits they have made, often known as taxable income. The new tax regime for individuals and Hindu Undivided Families (HUF) was introduced for the financial year (FY) 2020–21 in the Union Budget 2020.
Accordingly, taxpayers could choose to pay less in taxes without being able to take advantage of exemptions and deductions. When it was first implemented, the new tax system comprised of seven distinct slabs.
As the new tax system proved unpopular with taxpayers after three years of implementation, the government has cut both the slab count and the tax rates under the new tax regime in Union Budget 2023.
Changes introduced in the new income tax regime in Union Budget 2023-24
The extension of the rebate for people subject to the new income tax regime for yearly incomes up to INR 700,000 is the most noteworthy announcement in the 2023 budget. People with incomes up to INR 500,000 previously paid no income tax under either the old or new tax schemes.
Under the new income tax regime, a standard deduction of INR 50,000 has also been added. This means that under the new income tax regime, a salaried taxpayer would also be eligible for an upfront deduction of INR 50,000 off their total taxable income; previously, this deduction was only allowed under the old structure.
Under the new income tax system, the government has also rationalized the tax slabs, bringing the total number of taxable brackets down to five.
According to the government, all taxpayers who choose the new system will receive significant relief from these measures.
For instance, a person earning INR 1 million annually will only be obligated to pay tax totaling INR 54,600, against INR 75,400 in the old regime. Similarly, a person earning INR 1.5 million annually would only have to pay a tax of INR 145,600, which is much lower in contrast to a tax liability of INR 210,660 under the old regime.
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New Income Tax Structure as per Union Budget 2023-24 |
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|
Tax slab for different Incomes |
New income tax rates |
|
INR 0 – 300,000 |
No tax |
|
INR 300,000 – 600,000 |
5% (income limit for tax rebate increased to INR 700,000 from INR 500,000) |
|
INR 600,000 – 900,000 |
10% |
|
INR 900,000 – 1,200,000 |
15% |
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INR 1,200,000 – 1,500,000 |
20% |
|
INR 1,500,000 and above |
30% |
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Changes in Income Tax Slabs under New Regime |
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Income tax rates (in %) |
Previous income slab |
New income slab |
|
NIL |
INR 0- 250,000 |
INR 0 – 300,000 |
|
5% |
INR 250,000 – 500,000 |
INR 300,000 – 600,000 |
|
10% |
INR 500,000 – 750,000 |
INR 600,000 – 900,000 |
|
15% |
INR 750,000 – 1,000,000 |
INR 900,000 – 1,200,000 |
|
20% |
INR 1,000,000 – 1,250,000 |
INR 1,200,000 – 1,500,000 |
|
25% |
INR 1,250,000 – 1,500,000 |
— |
|
30% |
INR 1,500,000 and above |
INR 1,500,000 and above |
Old tax regime
Despite having higher tax slabs, the old tax system has remained the mainstay for taxpayers in the country since it gives those with greater yearly earnings and more investments more room for tax deductions.
Under the old taxation system, the assessee can make use of deductions, exemptions, and other allowances to carefully organize their finances and reduce their tax burden.
The following expenses are deductible under the previous tax system: Public Provident Fund (PPF), Equity-Linked Savings Schemes (ELSS), Employees’ Provident Fund (EPF), life insurance premiums, principal and interest payments on a mortgage, health insurance premiums, investments in NPS, child tuition fees, and interest on savings accounts.
The following items are exempt from this list: House Rent Allowance (HRA), Leave Travel Allowance (LTA), reimbursement for mobile and internet, food coupons or vouchers, company-leased automobile, standard deduction, uniform allowance, and leave encashment.
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Income Tax Slabs for FY 2023-24 Under the Old Regime |
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Income tax slabs |
Income tax rate (%) |
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INR 0 – 250,000 |
0 |
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INR 250,000 – 500,000 |
5% |
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INR 500,00 – 1,000,000 |
20% |
|
INR 1,000,000 and above |
30% |
New vs old income tax regime: What’s better for you?
Taxpayers have more freedom under the new tax system to invest their money as per their financial goals. Under the new system, there is no obligation to invest in insurance and tax-saving plans, which may not be in alignment with their long-term financial objectives.
Under the new tax system, using Section 80C for investments has no tax benefits. In theory, taxpayers will now be accountable for better planning of their financial objectives and picking appropriate investments. Tax deductions for these instruments won’t apply. Instead, the taxation of revenues or accumulations will be considered.
In the old tax regime, taxpayers were motivated to choose specific instruments for investment to be eligible for tax reduction.
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Calculation of Tax Savings Under Different Regimes |
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Salary income before any deductions / exemptions |
Existing regime (Old Regime) |
Current new regime (FY 2022-23) |
Proposed new regime (FY 2023-24) |
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INR 500,000 |
– |
– |
– |
|
INR 550,000 |
– |
INR 18,200 |
– |
|
INR 600,000 |
– |
INR 23,400 |
– |
|
INR 700,000 |
– |
INR 33,800 |
– |
|
INR 750,000 |
INR 23,400 |
INR 39,000 |
– |
|
INR 1,000,000 |
INR 75,400 |
INR 78,000 |
INR 54,600 |
|
INR 1,500,000 |
INR 210,660 |
INR 195,000 |
INR 145,600 |
|
INR 3,000,000 |
INR 678,600 |
INR 663,000 |
INR 608,400 |
|
INR 7,000,000 |
INR 2,119,260 |
INR 2,102,100 |
INR 2,042,040 |
|
INR 15,000,000 |
INR 5,085,990 |
INR 5,068,050 |
INR 5,005,260 |
|
INR 50,000,000 |
INR 19,178,250 |
INR 19,158,750 |
INR 19,090,500 |
|
INR 55,000,000 |
INR 23,156,562 |
INR 23,135,190 |
INR 21,040,500 |
|
INR 60,000,000 |
INR 25,293,762 |
INR 25,272,390 |
INR 22,990,500 |
Who should move from the old to the new regime?
Taxpayers who annually earn more than INR 50 million per year on the higher bracket and up to INR 750,000 on the lower bracket might choose to participate under the new regime since their tax burden will be reduced greatly. With the proposed normal deduction of INR 50,000 and the Section 87A rebate, individuals with income between INR 500,000 and INR 700,000 will be exempt from paying taxes. On the other hand, under the new system, the surcharge for taxpayers earning more than INR 50 million annually is proposed to be cut to 25 percent (from the current 37 percent rate). This, in turn, will reduce their gross tax burden, including any applicable cess, to 39 percent (as against the present 42.74 percent).
Who should continue under the old regime?
Taxpayers who earn between INR 800,000 and INR 50 million and claim deductions and/or exemptions of INR 250,000 or more may be able to maximize their savings better under the old system.
About Us
India Briefing is produced by Dezan Shira & Associates. The firm assists foreign investors throughout Asia from offices across the world, including in Delhi and Mumbai. Readers may write to india@dezshira.com for more support on doing business in in India.
We also maintain offices or have alliance partners assisting foreign investors in Indonesia, Singapore, Vietnam, Philippines, Malaysia, Thailand, Italy, Germany, and the United States, in addition to practices in Bangladesh and Russia.
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