The Old vs. New Tax Regime Debate: Which benefits the Most?

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The Old vs. New Tax Regime Debate: Which benefits the Most?

 

In the last issue of The Tax Talk, we had discussed the new tax regime & its key feature. The old tax regime allows taxpayers to enjoy a plethora of exemptions and deductions which reduces the taxable income. Despite this, the new tax regime may be beneficial in many cases as it has a separate tax rate & slab. The tax rate and slab under the new tax regime is Nil for income up to Rs. 3 Lakh, 5% for income between Rs. 3 to 6 Lakh, 10% for income between Rs. 6 to 9 Lakh, 15% for income between Rs. 9 to 12 Lakh, 20% for income between Rs. 12 to 15 Lakh, 30% for income above Rs. 15 Lakh. Under the old tax regime, the tax rate is 5% for income between Rs. 2.50 to 5 Lakh, 20% for income between Rs. 5 to 10 Lakh & 30% for income above Rs. 10 Lakh. The most appealing part of the new tax regime is that it offers a higher tax rebate under section 87A which has been increased from Rs. 12,500/- to Rs. 25,000/-. As a result of this, all individuals with income up to Rs. 7 will not be required to pay a single penny under the new tax regime. Apart from this, the benefit of standard deduction is now extended to the salaried taxpayer opting for the new tax regime. Further, reduction in the highest surcharge rate from 37% to 25% has made the new tax regime more beneficial for HNI.

The most important question raised by the taxpayers are;

  1. Whether it is advisable to opt for a new tax regime even if the person has invested in LIC/PPF/Mediclaim policies or have availed the housing loan.
  2. Whether the basic exemption limit is Rs. 7 Lakh for the taxpayers who have opted for a new tax regime?

Let us discuss it:

  1. Whether the old regime could still be better?

Both regimes have their own sets of pros and cons. The choice of the tax regime would necessarily depend on:
a) Income Slab: Tax regime choice would be dependent on the income slab applicable to individuals.
b) Exemption & Deductions: The extent of available exemptions and deductions plays a crucial role in the decision-making process
c) Alternate Investment option: Consideration of alternative investment options and their returns may influence the decision.
d) Financial Goals: Short-term and long-term financial goals are equally important while making the investment & claiming deduction.

While the new tax regime has a simplified tax structure, it is advisable to calculate the tax liability under both regimes before making a decision

  1. Even though there are numerous benefits & motivation now for the taxpayers under the new tax regime, still the old regime could be better in some cases.
  1. The detailed chart hereunder illustrates the minimum amount of exemptions/deductions (such as LIC/PPF, Mediclaim, housing loan interest) above which the old tax regime may be more advantageous. Taxpayers can work out their tax outgo to decide which regime is better.
 TAX LIABILITY UNDER NEW TAX REGIME

FROM FY 2023-24

 
 
Gross Total Income Tax Rebate U/s 87A  Cess  Total Tax  Tax under the Old Regime                       …. Minimum amount of

Exemption/ Deduction after which the old Regime will be better

 I  IV  V  VI  VII  VIII  VIII
        500,000        10,000        10,000                 –                   –                   –                        –  
        600,000        15,000        15,000                 –                   –          33,800          100,000
        650,000        20,000        20,000                 –                   –          44,200          150,000
        700,000        25,000        25,000                 –                   –          54,600          200,000
        800,000        35,000                 –            1,400        36,400        75,400          187,500
        900,000        45,000                 –            1,800        46,800        96,200          237,505
     1,000,000        60,000                 –            2,400        62,400      117,000          262,504
     1,100,000        75,000                 –            3,000        78,000      148,200          287,503
     1,200,000        90,000                 –            3,600        93,600      179,400          312,502
     1,300,000      110,000                 –            4,400      114,400      210,600          312,500
     1,400,000      130,000                 –            5,200      135,200      241,800          341,666
     1,500,000      150,000                 –            6,000      156,000      273,000          375,000
     1,600,000      180,000                 –            7,200      187,200      304,200          375,000
     1,700,000      210,000                 –            8,400      218,400      335,400          375,000
     1,800,000      240,000                 –            9,600      249,600      366,600          375,000
     1,900,000      270,000                 –          10,800      280,800      397,800          375,000
     2,000,000      300,000                 –          12,000      312,000      429,000          375,000
     2,100,000      330,000                 –          13,200      343,200      460,200          375,000

 

The copy of the order is as under:

Chart (2)

 

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