New vs Old Tax Regime- A Guide for FY 2023-24 Income Tax Filers

With the introduction of the new tax regime and its divergence from the familiar old tax regime, Indian taxpayers can find themselves at crossroads regarding the old vs new tax slab. As we conclude the financial year 2023-24 and prepare for the tax filing season, grasping the comparison between new vs old tax regime becomes pivotal for every income tax filer.

The old tax regime, a stalwart of taxation for years, offered a structured system with well-defined deductions and exemptions, providing taxpayers with a roadmap for their financial planning. In Budget 2020, a new tax regime was introduced, altering tax slabs and offering concessional rates. However, a recent survey by Policybazaar, highlights that despite the introduction of the new tax regime, the old tax regime continues to be favored by 63% of taxpayers. Hence, the government introduced some key changes in the 2023 Budget to incentivize adoption of the new tax regime, applicable for FY 2023-24 and beyond.

Thus, this comparison between the new vs old tax regime is not merely about crunching numbers. It’s about empowering Indian taxpayers to attain tax efficiency. Whether you are a seasoned taxpayer accustomed to the old regime or someone contemplating a switch to the new one, this guide regarding old vs new tax slab and regulations is designed to equip you to chart out the right course for FY 2023-24.

What are the critical amendments related to FY 2023-24 & beyond that one must consider while drawing comparison between new vs old tax regime?

With the introduction of Budget 2023, some significant changes have been made in the tax system starting from FY 2023-24, aiming to encourage taxpayers to consider switching to the new tax regime. Let’s check these out before delving deeper in the comparison between new vs old tax regime

1. Higher Tax Rebate Limit

Under the new tax regime, individuals earning up to ₹7 lakhs annually will now enjoy a full tax rebate, compared to ₹5 lakhs in the old regime. This means that those earning up to ₹7 lakhs won’t have to pay any tax at all!

1. Streamlined Tax Slabs

The tax exemption limit has been raised to ₹3 lakhs and the number of slabs is reduced to 5. The new tax slab rates are as follows-

1. Deductions-

The standard deduction of ₹50,000, previously available only under the old regime, is now extended to the new tax regime as well, making ₹7.5 lakhs as tax-free income. Additionally, family pensioners can claim a deduction of ₹15,000 or 1/3rd of the pension, whichever is lower, and only employer contributions to NPS are eligible for deduction under the new regime.

1. Reduced Surcharge for High Net Worth Individuals-

The surcharge rate on income over ₹5 crores has been decreased from 37% to 25%, resulting in a lower effective tax rate for high-income earners.

1. Higher Leave Encashment Exemption

Non-government employees can now enjoy a raised exemption limit for leave encashment, increased from ₹3 lakhs to ₹25 lakhs, marking an eight-fold increase.

1. Default Regime

From FY 2023-24 onwards, the new income tax regime will be the default option. Taxpayers who wish to continue using the old regime must submit their income tax return along with Form 10IEA before the due date.

What is the difference in tax liability as per old vs new tax slab?

To understand the comparison between the new vs old tax regime better, here is an illustration that points out the difference in tax liability in the old vs new tax slab.

Salaried individual

Example-1

Sandeep, a salaried individual earns ₹20 lakhs for the FY 2023-24. Here is the estimation of the tax payable under the two regimes-

Under the old tax regime:

Standard deduction: ₹ 50,000

Deduction under 80C: ₹1.5 lakhs

Taxable income after deductions: ₹ 20,00,000 – ₹50,000 – ₹1,50,000 = ₹18,00,000

Tax calculation:

₹ 2.5 lakh income: Tax exempt

₹2.5 lakh to ₹5 lakh income: Taxed at 5%

₹ 5 lakh to ₹10 lakh income: Taxed at 20%

Remaining income (₹18,00,000 – ₹10,00,000): Taxed at 30%

Tax liability = (5% of ₹2,50,000) + (20% of ₹5,00,000) + (30% of ₹8,00,000) = ₹12,500 + ₹1,00,000 +  ₹240,000 = ₹352,500

Under the new tax regime

Standard deduction: ₹50,000

Taxable income after deduction: ₹ 20,00,000 – ₹50,000 = ₹19,50,000

Tax calculation based on new tax slabs:

₹ 3 lakh income: Tax exempt

₹3 lakh to ₹ 6 lakh income: Taxed at 5%

₹6 lakh to ₹9 lakh income: Taxed at 10%

₹9 lakh to ₹12 lakh income: Taxed at 15%

₹15 lakh to ₹12 lakh income: Taxed at 20%

₹15 lakh and above: Taxed at 30%

Tax liability = (5% of ₹3,00,000) + (10% of ₹3,00,000) + (15% of ₹ 3,00,000) + (20% of ₹3,00,000)+ (30% of 4,50,000) = ₹15000 + ₹30,000+ ₹45000+ ₹60,000 + ₹135,000

= ₹285,000.

Difference in Tax Liability:

Old Tax Regime: ₹3,52,500

New Tax Regime: ₹2,85,000

Therefore, in this case, the new tax regime proves more beneficial for Sandeep.

Non-salaried individual

Example-2

Let’s consider another hypothetical case of Ramesh, a freelance consultant who earned ₹10,00,000 during FY 2023-24 from his finance consulting services. Ramesh also makes investments under Section 80C, claiming the maximum deduction of ₹1.5 lakh.

Old Tax Regime

Ramesh’s taxable income: ₹10,00,000

Deduction under Section 80C: ₹1,50,000

Taxable income after deduction: ₹10,00,000 – ₹1,50,000 = ₹8,50,000

Tax Slab

₹ 2.5 lakh income: Tax exempt

₹2.5 lakh to ₹5 lakh income: Taxed at 5%

₹ 5 lakh to ₹10 lakh income: Taxed at 20%

Remaining income above ₹10 lakh: Taxed at 30%

₹2,50,000*5% + ₹350,000*20% = ₹12,500+₹70,000 = ₹82,500.

New Tax Regime

Ramesh’s taxable income: ₹10,00,000

₹ 3 lakh income: Tax exempt

₹3 lakh to ₹ 6 lakh income: Taxed at 5%

₹6 lakh to ₹9 lakh income: Taxed at 10%

₹9 lakh to ₹12 lakh income: Taxed at 15%

₹12 lakh to ₹15 lakh income: Taxed at 20%

₹15 lakh and above: Taxed at 30%

₹3,00,000*5% + ₹3,00,000*10% + ₹1,00,000*15%= ₹15,000+₹30,000+₹15000 = ₹60,000.

Difference in Tax Liability:

Old Tax Regime: ₹82,500

New Tax Regime: ₹60,000

Therefore, in this case, the new tax regime proves more beneficial for Sandeep.

Difference in Tax Liability

In this case, there is ₹22,500 less tax payable under the New Tax Regime for Ramesh, even after considering the deduction under Section 80C. In this example, we see that despite availing the maximum deduction under Section 80C, Ramesh still benefits more from the new tax regime due to the lower tax rates in his income bracket.

Conclusion

As we gear up for the tax filing season following the conclusion of FY 2023-24, the revisions outlined by the government in recent times emphasize on promoting the new tax regime. These amendments showcase a proactive effort to modernize the tax system, encouraging taxpayers to explore the benefits of the new regime.

However, while considering the comparison between the new vs old tax regime, informed decisions are key to resolve the complexities of taxation and secure our financial futures. Your decision hinges on factors like income levels, eligible deductions, and potential tax savings. For personalized guidance tailored to your specific situation, consulting a tax professional is highly recommended.

You can rely on the proficiency of our taxation experts at USAIndiaCFO. We can help you steer through this evolving income tax terrain with clarity and confidence, ensuring every rupee works to your advantage. Reach out to us to make your taxes work smarter for you!