Savings In Old Tax Regime And Existing New Tax Regime Explained In 5 Scenarios
Finance Minister Nirmala Sitharaman, in the Union Budget 2023-24, has proposed several changes to the personal income tax system with an aim to benefit taxpayers. The income tax rebate limit has been increased from ₹ 5 to ₹ 7 lakh, the tax slabs have undergone restructuring, and the new tax regime has been made the default system for everyone.
So far, the income tax rebate limit, allowed under Section 87A of the Income Tax Act, for both the old and new tax regimes, was ₹ 5 lakh. This meant that those with annual income up to ₹ 5 lakh were not required to pay any tax. The old tax regime had a higher tax rate but provided exemptions. The new tax regime, meanwhile, had a lower tax rate but one could not claim any exemptions. Now, the tax-free ceiling has been increased to ₹ 7 lahks but only for those who choose the new tax regime.
The tax slabs in the new tax regime have also been revised. The no-tax slab has been increased by ₹ 50,000. Now, income between ₹ 0 to ₹ 3 lakh will not be taxed. Earlier, the basic tax exemption limit under both regimes was ₹ 2.5 lacks. In addition, the number of slabs in the new tag regime has been brought down to five.
According to Finance Minister Nirmala Sitharaman, “The personal income tax has had substantial changes (in the Budget) which will benefit the middle class. The new taxation regime has now got greater traction and incentive so that people can now unhesitatingly move to the new regime from old”.
With the new tax regime made default, taxpayers, in the new financial year, will have to specify if they want to opt for the old tax regime. Otherwise, the income tax will be calculated as per the proposed new tax regime for everyone.
Since the Budget 2023 announcement, many taxpayers have been trying to analyze which tax regime will give them greater benefits. For now, taxpayers can choose between the old tax regime and the existing new tax regime. The proposed new tax regime will be applicable to the income earned in the new financial year.
Below we have tried to explain if you should switch to the new tax regime or stick to the old one to make more savings.
It must be noted that in the below cases, all individuals in the new tax regime have claimed ₹ 50,000 Standard Deduction, ₹ 1.5 lakh deductions under Section 80C of the Income Tax Act, Rs 50,000 deduction for investment in the National Pension Scheme (NPS) under Section 80CCD (1B), and tax exemption of ₹ 75,000 on HRA and home loan. Here, the total deductions and exemptions availed come out to be ₹ 3,25,000.
On the other hand, there are no deductions or exemptions available in the existing new tax regime so the actual income is equal to the taxable income in every scenario. In the proposed new tax regime, a standard deduction of ₹ 50,000 has been allowed.
Income of ₹ 8 lakh (Old Tax Regime)
If a salaried person earns an annual income of ₹ 8 lakh then his taxable income after claiming all deductions and exemptions is ₹ 4,75,000 as per the old tax regime. As this is below the ₹ 5 lakh rebate limit, the person doesn't need to pay any tax here.
Income of ₹ 8 lakh (Existing New Tax Regime)
For a person with an annual income of ₹ 8 lakh and who has chosen the existing new tax regime, his taxable remains the same as his actual income. As this exceeds the ₹ 5 lakh rebate limit, the person will have to pay an income tax of ₹ 46,800. This implies that such taxpayers will have to pay ₹ 46,800 more income tax in the existing new regime as compared to the older one.
Income of ₹ 10 lahks (Old Tax Regime)
If a taxpayer with an annual income of ₹ 10 lakh claims all deductions and exemptions available in the old tax regime, his taxable income becomes ₹ 6,75,000. The tax payable on this will be ₹ 49,400, which includes the education cess.
Income of ₹ 10 lakh (Existing New Tax Regime)
In the existing new tax regime, a taxpayer with annual income of ₹ 10 lakh will have to pay ₹ 78,000 as tax on a taxable income of ₹ 10 lakh. This means that by switching to the new tax regime, you will have to pay ₹ 28,600 more in income tax.
Income of ₹ 15 lakh (Old Tax Regime)
The taxable income for a person with an annual income of ₹ 15 lakh comes out to be ₹ 11,75,000 in the old tax regime. After taxation under applicable tax slabs, the person will have to pay ₹ 1,71,600 as income tax.
Income of ₹ 15 lahks (Existing New Tax Regime)
For a salaried employee with ₹ 15 lakh annual income, he will have to pay ₹ 1,95,000 income tax on a taxable income of ₹ 15 lakh. Comparing this to the old regime, you will be paying ₹ 23,400 more income tax here.
Income of ₹ 20 lahks (Old Tax regime)
For an annual income of ₹ 20 lahks, the tax is calculated on ₹ 16,75,000 after the deductions and exemptions are claimed in the old tax regime. The payable tax here comes out to be ₹ 3,27,600.
Income of ₹ 20 lahks (Existing New Tax Regime)
In the existing new tax regime, a person with an annual salary of ₹ 20 lacks will be paying ₹ 3,51,000 income tax on ₹ 20 lahks taxable income. Here too, adopting the new tax regime will cost you ₹ 23,400 more in income tax.
Income of ₹ 25 lakh (Old Tax Regime)
In the old tax regime, a person with a salary of ₹ 25 lahks per annum will pay ₹ 4,83,600 income tax. The taxable income here is ₹ 21,75,000, which is subject to tax under different tax slabs.