Income Tax Know-how

Confused between old and new tax regime? Here's the ultimate guide

As the new financial year rolls in, it is time to evaluate which tax regime to opt for

Difference between new and old tax regime: Which to opt for?

April 1 marks the beginning of a new financial year. This also happens to be the time when you would be receiving a reminder from the accounts department of your company, asking you to declare your investments and which tax regime you want to opt for.

If you are a salaried individual, you have two options: old tax regime and new tax regime. Choosing which to opt for is crucial since the TDS (tax deductible at source) is calculated accordingly, determining your in-hand salary.

So, let's look at which tax regime you should opt for. Below is a breakdown of the income tax slabs under the old and new tax regimes, along with fundamental differences between the two.

A primer

While the old tax regime has fewer tax slabs, the new tax regime has lower tax rates corresponding to each income group. Further, the tax exemption limit under the new regime has been increased to Rs 3 lakh, whereas it is Rs 2.5 lakh in the old regime.

Here's a table showing the differences in income tax slab rates between the two regimes.

Tax slabs: Old vs new tax regime

The new regime has more tax slabs compared to the old one

Old tax regime

Income (Rs) Tax rate (%)
Up to 2.5 lakh Nil
2.5 to 5 lakh 5
5 to 10 lakh 20
Above 10 lakh 30

New tax regime 

Income (Rs) Tax rate (%)
Up to 3 lakh Nil
3 to 6 lakh 5
6 to 9 lakh 10
9 to 12 lakh 15
12 to 15 lakh 20
Above 15 lakh 30
Note: Applicable for resident Indians under 60 years of age. 
  • As you can see from the above table, the new tax regime offers lower tax rates corresponding to each income group.
  • However, this comes at the cost of foregoing several deductions and exemptions available under the old regime, including house rent allowance (HRA), interest on home loan, Section 80C and 80D (premium paid on health insurance) and so on.
  • On the brighter side, the benefit of rebate under Section 87A and standard deduction of Rs 50,000 for salaried individuals applies to the new tax regime as well. In other words, it effectively makes your income of up to Rs 7.5 lakh tax-free as against Rs 5.5 lakh in the case of the old regime.

Old vs new: Which should you choose?

While the new tax regime allows for more streamlined and simplified return filing, it does not have many deductions and exemptions of the old regime.

Hence, the old tax regime is more suitable for those who can make good use of the available deductions and exemptions, such as:

  • House rent allowance
  • Interest on home loan
  • Rs 1.5 lakh tax deduction under Section 80C of the Income Tax Act
  • A further Rs 50,000 tax deduction if investing in the National Pension Scheme
  • Premium paid for health insurance under Section 80D of the Income Tax Act..

Direct comparison between old and new tax regime

If you look at the middle column titled 'Deductions required' in the table below, the amount mentioned there can determine which tax regime you should choose. For instance, assuming the annual income is Rs 10 lakh and your deductions (aggregate of HRA, 80C investments, etc.) are less than Rs 2.5 lakh, we suggest you choose the new regime. If it exceeds Rs 2.5 lakh, go for the old tax regime.

Old or new: Which is better for you?

Choose the old tax regime if the deductions exceed the required amount 

Income (Rs) Deductions required (Rs) Tax liability (Rs)
Up to 7 lakh                                           1,50,000                                                 -  
8 lakh                                           1,62,500                                         31,200
9 lakh                                           2,12,500                                         41,600
10 lakh                                           2,50,000                                         54,600
11 lakh                                           2,75,000                                         70,200
12 lakh                                           3,00,000                                         85,800
13 lakh                                           3,12,500                                 1,04,000
14 lakh                                           3,25,000                                 1,24,800
15 lakh                                           3,58,333                                 1,45,600
15.5 lakh to 50 lakh                                           3,75,000 1,56,000 + 31.2% of income in excess of 15.5 lakh 
Note: Calculations after taking into consideration the standard deduction of Rs 50,000

Our view

The new tax regime is a better option for individuals with an annual income of Rs 7.5 lakh or lower since no tax is levied up to this amount.

For those earning more than Rs 7.5 lakh per annum, the old tax regime might be more suited, provided you can take advantage of the available deductions and exemptions. You can use our tax calculator to evaluate which regime benefits you more.

If the tax calculator indicates the old system is better for you, you'd have to voluntarily opt for it because, from FY24, the government made the new tax regime the default option.

Also read: Which ITR form do you need to fill?


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