Old Vs New Tax Regime: Which One To Choose

At first glance, the proposed revised tax regime for Budget 2023  may appear more favorable than the current one due to the proposed reduction in taxes and the inclusion of a standard deduction. However, comparing the old and revised new tax regimes is not a straightforward matter and depends on your income levels, CTC structure, liquidity requirements and personal priorities.  While tax rates may be higher in the old regime, it offers deductions and exemptions that lower tax liability. In contrast, the revised new tax regime, which was introduced in Budget 2020, aims to simplify tax calculation by eliminating exemptions and deductions. If you are unsure about which option to choose.

Here are a few case studies to facilitate quick decision-making

Case 1: If Your Salary is Below 7.5 Lakhs

If your taxable income is below Rs 7.5 lakh, it is recommended to opt for the new income tax regime. This is because the new regime offers a tax exemption on income up to Rs 7 lakh and a standard deduction of Rs 50,000, making it a simple and beneficial choice for those with income up to Rs 7.5 lakh.

Case 2: If you can claim 1.5 lakh deduction under 80C

If an individual can only claim Rs 1.5 lakh as a deduction under section 80C of the Income Tax Act, 1961, then opting for the new tax regime may be more advantageous due to the lower tax rates. Section 80C allows deductions on various investments and expenses such as PPF, insurance policies, Equity Linked Saving Scheme or ELSS, tuition fees, home loan principal, and Employee Provident Fund (EPF) which reduce the taxable income and hence the tax liability. However, if an individual’s total deductions under this section are only Rs 1.5 lakh, the new tax regime may be a more viable option.

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Case 3: IF you can claim other Deductions then Choose the Old Regime

If you are eligible to claim other deductions apart from 80C, such as interest on home loans and health insurance, then it may be more advantageous for you to opt for the old tax regime. Back-of-the-envelope calculations indicate that if total deductions of Rs. 4.25 lakh (which includes a standard deduction of Rs. 50,000, Rs. 2 lacks for home loan interest deduction under section 24B, Rs. 1.5 lakh deduction under section 80C, and Rs. 25,000 under section 80D for health insurance) are taken into account, then the income tax under both the old and the new tax regimes will be the same for a gross income of Rs. 16,00,000 and above. Therefore, the old tax regime may be more beneficial for taxpayers who are eligible to claim deductions other than section 80C. The more deductions you can claim, the lower your tax liability will be under the old tax regime.

If you do not have any tax-saving investments or expenses, opting for the new tax scheme can be beneficial as it offers lower tax rates.

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