Finance Minister announced the full general budget for FY 2024-25. In this budget some changes have been made in income tax new regime. An individual tax paying citizen of India can choose the tax regime and pay income tax accordingly. You may choose the tax regime based on the benefit or minimum income tax you have to pay. Now the question is that Old Tax regime vs New Tax Regime which is better, which one to choose for maximum benefit.
New Tax regime was first introduced in the FY 2020-21. After that few changes have happened every year during budget. So we will compare old tax regime vs new tax regime for current financial year i.e. FY 2024-25 or AY 2025-26 for which you will file the income tax return during June July 2025 and plan your tax savings accordingly this year.
Difference between Old Tax Regime vs New Tax Regime:
When comparing the old and new tax regimes in India, it’s essential to understand how each impacts your financial planning and tax liability. The old tax regime was structured around various deductions and exemptions that taxpayers could claim, allowing them to reduce their taxable income significantly. The following deductions are allowed in the old tax regime.
- Leave Travel Allowance.
- House Rent Allowance
- Clause (14), a few of the exclusive benefits included in Rule 2BB, such as children education allowance, travel allowance, uniform allowance, hostel allowance, per diem allowance, etc.
- Clause (32) allowances for clubbing of the income of a minor
- Deduction for entertainment allowances, and employment, standard deductions, professional tax as contained under the Section 16.
- Depreciation under the Section of 32(1) (iia)
- Interest under section 24 for vacant or self-occupied property
- Finally, the deductions, under the chapter VI-A (like section 80C, 80CCC, 80CCD, 80D, 80DD, 80DDB, 80E, 80EE, 80EEA, 80EEB, 80G, 80GG, 80GGA, 80GGC, 80IA, 80-IAB, 80-IAC, 80-IB, 80-IBA, etc.).
However, this regime required careful planning and a thorough understanding of the various exemptions and deductions to optimize tax savings, making it somewhat complex for the average taxpayer.
You can check some positives and negatives of old tax regime in https://investdunia.com/comparison-between-the-new-tax-regime-vs-old-tax-regime-in-india-and-which-is-better/
On the other hand, the new tax regime introduced in 2020 offers a simplified approach with lower tax rates across different income slabs. The catch, however, is that it does not allow most of the deductions and exemptions that were available in the old regime. This makes the new regime easier to understand and implement since taxpayers don’t have to worry about claiming numerous exemptions and deductions. However, the lack of these tax-saving options could lead to a higher tax liability for individuals who previously benefited from them under the old regime.
Apart from reduced burden of documentation some positive aspects of New Tax Regime
- Investors can opt for open ended schemes or closed ended schemes based on investment returns. Earlier some investment schemes are having minimum tenure of investment to get the income tax benefit.
- There are no lock in periods for tax saving investments
- People are having more liquidity and choice for investment in their hand.
Tax slabs under New Tax regime
| Total Income | Tax Rate |
| Up to ₹ 300000 | Nil |
| ₹ 300001 – ₹ 700000 | 5% |
| ₹ 7,00,001 – ₹ 10,00,000 | 10% |
| ₹ 10,00,001 – ₹ 12,00,000 | 15% |
| ₹ 12,00,001 – ₹ 15,00,000 | 20% |
| ₹ 15,00,0001 and above | 30% |
Example
Let us take a case of salaried taxpayer with ₹10 lakhs annual income.
A standard deduction of ₹ 75000 is applicable for both New Tax Regime and ₹ 50,000 is applicable for Old Tax Regime.
Under the old tax regime, they could claim deductions under Section 80C for investments like PPF and ELSS (Equity Linked Savings Scheme), which could reduce their taxable income by ₹1.5 lakhs. Additionally, if they pay rent, they could claim HRA, further reducing their taxable income. After applying these deductions, their tax liability could be significantly lower.
In contrast, under the new tax regime, while the tax rates are lower, the individual cannot claim these deductions. This means their entire ₹10 lakh income would be taxed, potentially resulting in a higher tax outflow compared to the old regime if they were maximizing their deductions.
Key Points to Consider:
- Old Tax Regime: Beneficial if you have multiple deductions and exemptions. Requires tax planning.
- New Tax Regime: Simplified with lower tax rates but no deductions. Easier for those without significant tax-saving investments.
- Example: Higher-income individuals with substantial investments in tax-saving instruments might find the old regime more advantageous.
In summary, the choice between the old and new tax regimes depends on your financial situation and whether you prefer simplicity or wish to leverage tax-saving investments.
Here’s an expanded example with detailed calculations and a comparison table:
Example Scenario:
Let’s consider an individual named Raj, who earns a gross annual income of ₹10 lakhs. He has investments and expenses eligible for deductions and exemptions under the old tax regime:
- Standard Deduction: ₹50,000
- Section 80C Investments (PPF, ELSS, etc.): ₹1.5 lakhs
- Health Insurance Premium (Section 80D): ₹25,000
- House Rent Allowance (HRA): ₹1.2 lakhs (assuming eligible HRA deduction is ₹1 lakh after accounting for rent paid and other factors)
Old Tax Regime Calculation:
- Gross Income: ₹10,00,000
- Less: Standard Deduction: ₹50,000
- Less: Deductions under Section 80C: ₹1,50,000
- Less: Deductions under Section 80D: ₹25,000
- Less: HRA Exemption: ₹1,00,000
Total Taxable Income: ₹10,00,000 – ₹50,000 – ₹1,50,000 – ₹25,000 – ₹1,00,000 = ₹6,75,000
Tax Calculation under Old Regime:
- ₹2,50,000 @ 0% = ₹0
- ₹2,50,001 – ₹5,00,000 @ 5% = ₹12,500
- ₹5,00,001 – ₹6,75,000 @ 20% = ₹35,000
Total Tax Liability: ₹12,500 + ₹35,000 = ₹47,500
Less: Rebate under Section 87A (if applicable) = N/A in this case as income exceeds ₹5,00,000
Add: Cess @ 4% on Tax: ₹47,500 * 4% = ₹1,900
Net Tax Payable (Old Regime): ₹49,400
New Tax Regime Calculation:
In the new regime, Raj cannot claim any deductions or exemptions.
- Gross Income: ₹10,00,000
- Less Standard Deduction : ₹ 75,000
- Taxable Income: ₹9,25,000
Tax Calculation under New Regime:
- ₹3,00,000 @ 0% = ₹0
- ₹3,00,001 – ₹7,00,000 @ 5% = ₹20,000
- ₹7,00,001 – ₹9,25,000 @ 10% = ₹22,500
Total Tax Liability: ₹20,000 + ₹22,500 = ₹42,500
Add: Cess @ 4% on Tax: ₹42,500 * 4% = ₹1,700
Net Tax Payable (New Regime): ₹44,200
Comparison Table:
| Particulars | Old Tax Regime | New Tax Regime |
| Gross Income | ₹10,00,000 | ₹10,00,000 |
| Deductions/Exemptions | ₹3,25,000 | ₹75,000 |
| Taxable Income | ₹6,75,000 | ₹9,25,000 |
| Tax Before Cess | ₹47,500 | ₹42,500 |
| Cess @ 4% | ₹1,900 | ₹1,700 |
| Net Tax Payable | ₹49,400 | ₹44,200 |
Summary:
In this scenario, Raj benefits more from the new tax regime due to the lower tax rate. Even if he has some tax savings it is beneficial to opt for new income tax regime.
Old Tax Regime Vs New Tax Regime Which is better?
The old regime requires more detailed tax planning but can be more beneficial if you have significant deductions. The new regime, while simpler, may lead to higher taxes. If you are not using tax savings investments and home loan interest benefit in full, the new tax regime is better. If you are using the tax saving investments and home loan benefit partially the tax outgo depends on the income and investment level. Please calculate before choosing the tax regime. A calculator is developed by income tax department for this calculation.
One of the most beneficial aspects of the taxation system is that even if you choose one of the rules, you can exercise it in every financial year. However, this option is not applicable for the taxpayers whose source of incomes is business. In simple words, taxpayers, who are involved in business won’t be capable of switching between the rules in every financial year. Therefore, it is necessary to know about the rules and evaluate which one is beneficial for you, your income and according to your tax savings investments.
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Author: Mr. Somesh Ghosh, an electrical engineer by profession has passion in freelancing, content writing, web site designing, video editing, blogging etc.
