Old vs New Tax Regime: Which Is Better New Or Old Tax Regime For Salaried Employees?

The recent Budget 2023 has caused a lot of confusion among taxpayers regarding the choice between the old and new tax regimes. The government has introduced various incentives in the 2023 Budget to encourage the adoption of the new regime. 

These changes show that the government’s intention is to have taxpayers transition to the new regime and eventually phase out the old one. Though the new regime is now the default tax regime, the old tax regime will continue to exist. 

Let’s look at both regimes and see which regime to opt for in 2023.

New Tax Regime

A new tax regime was introduced in Budget 2020 wherein the tax slabs were altered, and taxpayers were offered concessional tax rates. However, those who opt for the new regime cannot claim several exemptions and deductions, such as HRA, LTA, 80C, 80D and more. Because of this, the new tax regime did not have many takers. The government in Budget 2023 introduced 5 key changes to encourage taxpayers to adopt the new regime. They are:

• Higher Tax Rebate Limit: Full tax rebate on an income up to ₹7 lakhs has been introduced. Whereas, this threshold is ₹5 lakhs under the old tax regime. This means that taxpayers with an income of up to ₹7 lakhs will not have to pay any tax at all under the new tax regime! 
• Streamlined Tax Slabs: The tax exemption limit has been increased to ₹3 lakhs and the new tax slabs are: 

The tax rates under both the regimes compare as below:

• Standard Deduction and Family Pension Deduction: 
• Salary income: The standard deduction of ₹50,000, which was only available under the old regime, has now been extended to the new tax regime as well. This, along with the rebate, makes ₹7.5 lakhs as your tax-free income under the new regime.
• Family pension: Those receiving family pension can claim a deduction of: ₹15,000 or 1/3rd of pension, whichever is lower.
• Reduced Surcharge for High Net Worth Individuals: The surcharge rate on income over ₹5 crores has been reduced from 37% to 25%. This move will bring down their effective tax rate 42.74% to 39%.
• Higher Leave Encashment Exemption: The exemption limit for non-government employees has been raised from ₹3 lakhs to ₹25 lakhs, an 8-fold increase.
• Default Regime: Starting from FY 2023-24, the new income tax regime will be set as the default option. If you want to continue using the old regime, you must submit a form at the time of return filing. You will have the option to switch between the two regimes annually.

Old Tax Regime

The old regime is the tax system that prevailed before the introduction of the new regime. Under this regime, there are over 70 exemptions and deductions available, including HRA and LTA, that can reduce your taxable income and lower tax payments. The most popular and generous deduction is Section 80C, which allows for a reduction of taxable income up to Rs.1.5 lakh. The taxpayers are given a choice between the old and the new tax regime.

Difference Between Old Vs New Tax Regime: Which is Better?

The decision to switch to the new or remain in the old tax regime or which regime is better for you shall be based on the tax savings deductions and exemptions you are eligible for in the old tax regime. To make it easier, we have calculated a breakeven point for various income levels (refer to the table below) for a salaried individual below 60 years of age. This can be used to determine which regime to choose.

Breakeven threshold for deciding between New vs Old tax regimes

The Breakeven point is that amount where there will be no difference in tax liability between the two tax regimes.

If your total eligible deductions and exemptions in the old tax regime are higher than the breakeven threshold for your income level, it is advisable to stay in the old regime. On the other hand, if the breakeven threshold is higher, then moving to the new tax regime is more beneficial.

If you have salary income:

Tax under Old vs New regime 

Here are a few calculations to which will help you decide between old vs the new tax regime:

• When total deductions are ₹1.5 lakhs or less: New regime will be beneficial
• When total deductions are more than ₹3.75 lakhs: Old regime will be beneficial
• When total deductions are between ₹1.5lakhs to ₹3.75 lakhs: will depend on your income level

When total deductions are ₹1.5 lakhs or less: New regime will be beneficial

When total deductions are more than ₹3.75 lakhs: Old regime will be beneficial

When total deductions are between ₹1.5 lakhs to ₹3.75 lakhs: Will depend on various income levels

What deductions and exemptions are allowed under the new tax regime?

Here is a comparison between the deductions and exemptions available under the new and the old tax regime: