CVOCA

Old vs New Scheme – A practical approach – Pro’s and Con’s – Who should and should not Opt

Ishita Visaria July 1, 2024 Income Tax ⏱️ 10 min read

The Indian tax landscape can be a labyrinth of intricate pathways and perplexing choices. For taxpayers navigating this terrain, the selection between the old tax regime (OTR) and the new tax regime (NTR) presents a significant hurdle. Introduced in the 2020 budget, the NTR aimed to streamline the system with enticing lower tax rates. However, this simplification comes at a price – the sacrifice of numerous deductions and exemptions available under the OTR. This comprehensive guide delves into the intricacies of both regimes, empowering taxpayers in India to make an informed decision for Assessment Year (AY) 2024-25.

  1. Deciphering the Old Tax Regime (OTR):

Under the old tax system, taxpayers can avail up to 70 various deductions to reduce their taxable income. Some common deductions available under the old tax regime include:

  1. Section 80C: Deductions up to Rs 1.5 lakh can be claimed for investments in specified instruments like Employee Provident Fund (EPF), Public Provident Fund (PPF), Equity Linked Savings Scheme (ELSS), National Savings Certificate (NSC), etc.
  2. Section 80D: Deductions on health insurance premiums paid for self, family, and parents. Up to Rs 25,000 can be claimed for self, spouse, and dependent children, and an additional Rs 25,000 for parents. For senior citizens, the limit is higher.
  3. Section 24: Deductions on home loan interest payments. Up to Rs 2 lakh can be claimed for self-occupied property, and the entire interest paid can be claimed for let-out properties.
  4. Section 80E: Deductions on interest paid on education loans for higher studies.
  5. Section 80TTA: Deductions on savings account interest up to Rs 10,000.
  6. Section 80G: Deductions on donations made to specified funds and charitable institutions.
  7. Other deductions under various sections like 80GGA, 80GGC, 80U, etc., for specific expenses and situations.

These deductions help taxpayers reduce their taxable income and ultimately lower their tax liability under the old tax system. It is important for taxpayers to review these deductions and claim them appropriately to optimize their tax benefits.

Summarizing, the old tax regime is the existing tax structure under which taxpayers can claim various deductions and exemptions under different sections of the Income Tax Act. It has a higher tax rate but allows taxpayers to claim tax benefits on various investments and expenses.

NEW Tax Regime (NTR):

Introduced in Budget 2020, the NTR offers a simplified tax structure with lower tax rates. However, it comes with a significant caveat: most deductions and exemptions available under the OTR are foregone in the NTR. This streamlined approach aims to ease tax calculations and filing procedures.

Budget 2023 ushered in significant changes to the new regime, aiming to simplify tax calculations and provide relief to middle-income taxpayers.

  1. Higher Tax Rebate Limit: Under the new tax regime, individuals with an income of up to ₹7 lakhs receive a full tax rebate. This threshold was ₹5 lakhs in the old regime, meaning taxpayers earning up to ₹7 lakhs won’t pay any tax under the new regime.
  2. Streamlined Tax Slabs: The tax exemption limit has been increased to ₹3 lakhs. Simplified tax slabs make calculations easier for taxpayers.
  3. Standard Deduction and Family Pension Deduction: The standard deduction of ₹50,000, previously available only in the old regime, now extends to the new regime.Those receiving family pension can claim a deduction of ₹15,000 or 1/3rd of the pension (whichever is lower).
  4. Reduced Surcharge for High Net Worth Individuals: The surcharge rate on income over ₹5 crores has decreased from 37% to 25%. Effective tax rate for high net worth individuals now stands at 39%.
  5. Higher Leave Encashment Exemption: Non-government employees enjoy a significantly raised exemption limit for leave encashment – from ₹3 lakhs to ₹25 lakhs (an 8-fold increase).
  6. Default Regime: Starting from FY 2023-24, the new income tax regime becomes the default option. To continue using the old regime, submit the income tax return along with Form 10IEA before the due date. Annual switching between regimes is allowed to assess tax benefits in some cases.
  1. Understanding the two Regimes:

Comparison of key features of both regimes:

FeatureOld Tax Regime (OTR)New Tax Regime (NTR)
Income Tax Exemption LimitUp to Rs. 2.5 lakhs (Rs. 3 lakhs for senior citizens, Rs. 5 lakhs for super senior citizens)Rs. 3 lakhs
Section 87A RebateLimited applicabilityAvailable for incomes up to Rs. 7 lakhs (effectively offering no tax)
Tax RatesGenerally higherGenerally lower
Deductions and ExemptionsWide range of deductions and exemptions availableMinimal deductions and exemptions
Default SchemeNeeds to be opted forConsidered the default scheme
  • Comparison tax rates under both regime:
Income tax slab rates for FY 2023-24/ AY 2024-25 (Old Regime)
SlabsIndividuals ( Age < 60 years)Resident Senior Citizens (Age >= 60 but < 80  years)Resident Super Senior Citizens ( Age > 80 years )
Upto Rs. 2.5 lakhs0%0%0%
< Rs. 2.5 lakhs but ≥ Rs. 3 lakhs5%0%0%
< Rs. 3 lakhs but ≥ Rs. 5 lakhs5%5%0%
< Rs. 5 lakhs but ≥ Rs. 10 lakhs20%20%20%
Above Rs. 10 lakhs30%30%30%
Income tax slab rates for FY 2023-24/ AY 2024-25 New Regime
SlabsTax Rates
Upto Rs. 3 lakhs0%
< Rs. 3 lakhs but ≥ Rs. 6 lakhs5%
< Rs. 6 lakhs but ≥ Rs. 9 lakhs10%
< Rs. 9 lakhs but ≥ Rs. 12 lakhs15%
< Rs. 12 lakhs but ≥ Rs. 15 lakhs20%
Above Rs. 10 lakhs30%
  1. Difference Between Old Vs New Tax Regime:

New Tax Regime (NTR) might be better if:

  1. Your income is below ₹7 lakhs: With the increased tax rebate, you won’t pay any tax under NTR.
  2. You have minimal tax deductions: If you don’t utilize many deductions like HRA, LTA, or Section 80C contributions, the lower tax rates in NTR can be beneficial.
  3. You prefer a simpler tax filing process: NTR has fewer deductions to manage, potentially making filing easier.
  4. You don’t have specific investment goals or prefer flexibility in managing your finances. The lower tax rates and absence of mandatory deductions in NTR can free up more cash flow.

Old Tax Regime (OTR) might be better if:

  1. Your income is above ₹7 lakhs and you have high deductions: If you claim deductions exceeding the breakeven point for your income slab (refer to the table below), OTR can significantly reduce your tax liability.
  2. You receive HRA, LTA, or other allowances: These are exemptions not available under NTR and can lower your taxable income in OTR.
  3. You prioritize retirement savings, OTR’s deductions for contributions to retirement plans like NPS can be advantageous.
  4. Similarly, deductions for investments towards your child’s education under Section 80C can be beneficial under OTR.
  5. OTR allows deductions for investments in instruments like Equity Linked Savings Schemes (ELSS) that can help build wealth for long-term goals.
  6. Which Tax Regime is better for you.
  7. Breakeven Point Table: This table shows the income level (salary income post standard deduction) at which the tax liability under both regimes becomes equal. It helps you understand which regime offers a better benefit for your income level. (columns represent income and rows represent deductions)
            Deductions   ________ Incomes                0       1,00,000       1,50,000       1,62,500       1,87,500       2,12,500       2,37,500       2,50,000       2,62,500       2,87,500       3,12,500       3,25,000       3,50,000       3,75,000
5,00,000SAMESAMESAMESAMESAMESAMESAMESAMESAMESAMESAMESAMESAMESAME
6,00,000NewSAMESAMESAMESAMESAMESAMESAMESAMESAMESAMESAMESAMESAME
6,50,000NewSAMESAMEOldOldOldOldOldOldOldOldOldOldOld
7,50,000NewNewNewSAMEOldOldOldOldOldOldOldOldOldOld
8,00,000NewNewNewNewSAMEOldOldOldOldOldOldOldOldOld
8,50,000NewNewNewNewNewSAMEOldOldOldOldOldOldOldOld
9,00,000NewNewNewNewNewNewSAMEOldOldOldOldOldOldOld
9,50,000NewNewNewNewNewNewNewSAMEOldOldOldOldOldOld
10,00,000NewNewNewNewNewNewNewNewSAMEOldOldOldOldOld
11,00,000NewNewNewNewNewNewNewNewNewSAMEOldOldOldOld
12,00,000NewNewNewNewNewNewNewNewNewNewSAMEOldOldOld
13,50,000NewNewNewNewNewNewNewNewNewNewNewSAMEOldOld
14,25,000NewNewNewNewNewNewNewNewNewNewNewNewSAMEOld
15,00,000NewNewNewNewNewNewNewNewNewNewNewNewNewSAME
  1. Tax Calculators: Online Tax Calculators and software’s can help to estimate your tax liability under both regimes based on your income and deductions. The tools are available on income tax website also.

Additional Factors to consider:

  1. Future Deductions: If you anticipate claiming more deductions in the future, OTR might be a better long-term option.
  2. Investment Goals- Evaluate your investment goals before selecting which tax regime to choose. The new tax regime suits you if you are flexible with your investments and not looking forward to investing in tax-saving instruments. However, if you have investment goals such as retirement savings or building a corpus for a long-term goal, the old tax regime may be more beneficial as it offers deductions for contributions to various investment instruments.
  3. Loss from Other sources: Losses from house property, capital gains, or business can also influence your decision.
  4. Switching Between Regimes:
  5. Salaried Individuals: You can switch between the regimes every year, regardless of which regime you opted for during the year through TDS (Tax Deducted at Source). The option to change is available while filing your Income Tax Return (ITR).
  6. Individuals with Business/Profession Income: This group can only switch regimes once in their lifetime. So, choose wisely! If you start with the new regime, you can only switch back to the old regime once.
  7. Making the Choice: If you prefer the old regime with its deductions and exemptions, you need to file Form 10-IEA while submitting your ITR. Miss the deadline (Typically July 31st), and you’ll be automatically put under the new regime.
  8. Key Points to Remember:
  9. The new regime is the default now.
  10. Salaried individuals have more flexibility to switch regimes.
  11. Business owners/professionals get only one lifetime switch.
  12. File Form 10-IEA to opt for the old regime.
  13. Meet the ITR filing deadline to exercise your choice.
  14. Other Key information:

The Default: What You Need to Know

The Union Budget 2023 made the new tax regime the standard option for filing taxes. This means if you don’t actively choose the old regime, your income tax will be calculated under the new system. However, you still have the flexibility to switch.

Choosing Wisely Before Filing Your ITR

Filing your Income Tax Return (ITR) involves deciding on the tax regime that minimizes your tax burden. Both salaried individuals and business owners have the flexibility to choose between the new and old regimes during the filing process.

Understanding the ITR Forms:

The Income Tax Department provides clear instructions within the ITR forms for FY 2023-24 (AY 2024-25). They ask a straightforward question: “Opt out of the new tax regime?” (Default is no).

  • Selecting “No” indicates you accept the new regime’s tax slabs as the basis for tax calculation.
  • Selecting “Yes” signals your preference for the old tax regime with its different tax slabs.

Deadline Matters:

Remember, regardless of your choice, make your decision before the ITR filing deadline (typically July 31st). Missing this deadline automatically enrolls you in the new regime.

Business Owners: A One-Time Choice

While business owners and professionals can also switch to the old regime, they must use Form 10-IEA and submit it by the ITR filing due date. However, unlike salaried individuals, they have only one chance to switch back to the new regime after opting out.

  • Key Takeaways:
  • Choose your tax regime (new or old) before filing your ITR.
  • Salaried individuals enjoy greater flexibility to switch regimes each year.
  • Business owners get a one-time switch option from the new to the old regime.
  • Missing the deadline defaults you to the new regime.

Considering a tax advisor’s guidance can be helpful, especially for business owners, to ensure they make the most tax-efficient decision.

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