Old vs New Tax Regime: Detailed Guide for Salaried Individuals

Deciding between the old and new tax regimes can be challenging. What deductions are available in the old regime, and how can you minimize your tax burden if you opt for the new regime? Understanding the differences between the old and new tax regimes for the fiscal year 2023-24 (assessment year 2024-25) is essential to answer these questions and make well-informed decisions for your income tax filing.

Budget 2023 introduced several changes, mainly aiming to make the new tax regime more appealing. The goal behind these modifications was to encourage more taxpayers to switch to the new regime.

In this blog, we'll examine both old and new tax regimes, compare them, and determine which one might be the most beneficial choice for you if you're a salaried employee.

New Tax Regime

The new tax regime was introduced in Budget 2020 with concessional tax rates, aiming to simplify the tax structure. However, taxpayers opting for the new tax regime cannot claim major deductions such as HRA, LTA, and 80C. Initially, this led to fewer taxpayers choosing this regime. So, to make it more appealing than the old one, significant changes were made in Budget 2023.

Income Tax Slab Rate for New Tax Regime

Key Features and Objectives of New Tax Regime

1. Default Regime: From FY 2023-24, the new tax regime is the default. If you do not inform your employer about your preferred regime, TDS calculations will be based on the new tax regime.
2. Tax Rate Adjustments: The basic exemption limit under the new tax regime has been raised to ₹3 lakh from ₹2.5 lakh. The highest tax rate of 30% applies to income above ₹15 lakh.
3. Rebate Limit: The rebate under Section 87A has increased to ₹7 lakh from ₹5 lakh. The rebate benefit will be up to ₹25,000, provided the income does not exceed ₹7 lakh.
4. Standard Deduction: Salaried individuals can claim a standard deduction of ₹50,000 from their gross salary. Family pensioners can claim a standard deduction of ₹15,000 from their pension income.
5. Surcharge Limit: The surcharge on annual income above ₹5 crores has been reduced from 37% to 25%, lowering the maximum tax rate to 39%.
6. Leave Encashment Exemption: The tax exemption limit on leave encashment for non-government salaried employees has increased from ₹3 lakh to ₹25 lakh.
7. Insurance Plans: Income from traditional insurance policies with premiums over ₹5 lakh will not be tax-free.

List of Exemptions Under the New Tax Regime

1. Income from life insurance
2. Agricultural income
3. Standard deduction on rent
4. Retrenchment compensation
5. Leave encashment on retirement
6. VRS proceeds up to ₹5 lakhs
7. Death-cum-retirement benefit
8. Scholarship income for education

Old Tax Regime

The old tax regime refers to the tax system that existed prior to the introduction of the new regime. This system offers over 70 exemptions and deductions, such as HRA and LTA, which can help reduce your taxable income and lower your tax liability. Among these, Section 80C is the most popular and generous, allowing a deduction of up to ₹1.5 lakh from your taxable income. Taxpayers have the option to choose between the old and new tax regimes.

Compare Old vs New Income Tax Slabs Rates

Key Features and Objectives of Old Tax Regime

The old tax regime was designed to provide taxpayers with multiple ways to reduce their taxable income. Let's take a look at some of the key features of the old tax regime:

1. Incentivizing Savings and Investments: Encourages taxpayers to save and invest through tax-saving instruments like ELSS, PPF, and NPS, offering significant deductions under Chapter VI-A.
2. Relief for Specific Expenses: Provides tax relief on specific expenses such as home loan interest, family pension, and education loans, reducing the overall tax burden.
3. Flexibility in Tax Planning: Allows taxpayers to strategically plan their finances by claiming various deductions and exemptions, thus optimizing their tax liabilities.

Exemptions and Deductions under the Old Tax Regime Slabs 

1. Leave Travel Allowance (LTA)
2. House Rent Allowance (HRA)
3. Home Loan Interest: Tax relief on interest paid on home loans for self-occupied or vacant properties under Section 24.
4. Interest on Savings Accounts: Deductions under Sections 80TTA and 80TTB for interest earned from savings account deposits.
5. Standard Deduction: Salaried individuals can claim a standard deduction of ₹50,000.
6. Entertainment Allowance and Professional Tax: Available for government employees.
7. Family Pension: Deduction of ₹15,000 under clause (ii a) of Section 57.
8. Tax-Saving Investments: Deductions under Chapter VI-A, including Sections 80C, 80D, 80E, 80CCC, 80CCD, 80DD, 80DDB, 80EE, 80EEA, 80EEB, 80G, 80GG, 80GGA, 80GGC, 80IA, 80-IAB, 80-IAC, 80-IB, 80-IBA, etc. Popular options include ELSS, NPS, PPF, and tax breaks on insurance premiums. Exceptions include Section 80CCD(2) for employer contributions to NPS and Section 80JJAA for new employment.

Additionally, employees can claim deductions under Section 80CCD(2) for employer contributions to their NPS accounts and under Section 80JJAA for new employment.

Note: If an employee's contributions to EPF and NPS exceed ₹7.5 lakh in a financial year, the excess amount is taxable.

Which one to Choose: Old or New Regime?

To help you choose between the existing and new tax regimes, consider the following estimates:

• New Regime Advantage: The new tax regime becomes favorable if your total deductions are under ₹1.5 lakh.
• Old Regime Benefit: Opt for the old tax regime if your total deductions exceed ₹3.75 lakh.
• Middle Range Consideration: For total deductions between ₹1.5 lakh and ₹3.75 lakh, the better choice depends on your specific income level.