New Tax Regime vs Old: Which Tax Regime is Right for You in the Wake of India's Union Budget 2023?
Updated: Dec 15, 2023
The Indian government has proposed several changes in the 2023 Finance Bill to make the new personal tax regime more appealing to the general public.
Table of Content
New regime, introduced in 2020 under section 115BAC of the Income Tax Act, has not been as popular as expected due to the requirement of giving up certain deductions. The government hopes that these changes will make the new regime more attractive.
The government has proposed important changes to the new personal tax regime under section 115BAC in the 2023 Finance Bill to encourage more individuals to switch to it.
The goal is to simplify the tax filing and assessment process by reducing the number of deductions that can be claimed. The government hopes that these changes will make the new tax regime more appealing and user-friendly for taxpayers.
The new personal tax regime under section 115BAC has increased the basic exemption limit from INR 2.5 lakhs to INR 3 lakhs. The new proposed tax slab rates are as follows:
In the new personal tax regime under section 115BAC, the available limit of rebate under section 87A has been increased from INR 5 lakhs to INR 7 lakhs.
This means that individuals and HUFs with a gross total annual income of up to INR 7 lakhs will not have to pay any income tax, as the new rebate limit under section 87A offers a tax rebate of INR 25,000.
Important note to readers:
{It's important to note that this relief is in the form of a tax rebate and not an increase in the basic exemption limit. The increase in the basic exemption limit is only INR 50,000, as the limit has been raised from INR 2.5 lakhs to INR 3 lakhs.}
Therefore, if the income of an individual or HUF exceeds INR 7 lakhs, the rebate under section 87A will not be available and the newly prescribed tax rates in the table above will be applicable to such income.
Which one is better? New vs Old:
The question of which regime is more beneficial now depends on the gross annual total income of the individual or HUF.
If the gross annual total income is up to Rs 7 lakhs in fiscal year 2023-24 and beyond, it is clear that the new tax regime under section 115BAC provides a higher rebate of Rs 25,000 under section 87A, compared to the old regime's rebate limit of Rs 12,500. However, for those with a gross annual total income in excess of Rs 7 lakhs, a well-informed and considered choice must be made.
If we compare the tax rate of Old with the New regime, the new tax regime will be a clear winner as per below comparison table:
However, for those with a total income exceeding Rs. 7 lakhs, a more informed decision is necessary, as the new tax regime has no room for any deduction under chapter VI-A.
Below is the matrix to help you decide which scheme you should opt this tax filing season:
Difference Between Old and New Tax Regimes
When deciding between the old and new tax regimes in today's dynamic tax environment, it's essential to take a close look at your own financial situation and the advantages provided by both systems. We've produced a clear breakeven threshold for various income levels for those under 60 to help you make this critical choice. Once you're familiar with this limit, you can easily choose the tax rate that works best for your circumstances.
The Breakeven Threshold for Deciding Between New and Old Tax Regimes
At what income level does your tax burden under the old and new systems cancel each other out? That's the breakeven point. If your salary is beyond this level, you should continue paying taxes under the previous system since you will save more money. In contrast, switching to the new tax system is a better option if the breakeven level is higher than your deductions.
Tax Under Old vs. New Regime
To help you weigh the pros and cons of the old and new tax systems, we've provided the following calculations:
When total deductions are less than Rs. 1.5 lakhs, the new regime is preferable.
Over 3.75 lakhs in deductions? The old regime is preferable.
If your income falls between INR 1.5 lakhs and INR 3.75 lakhs, you may be eligible for a tax refund.
How to Choose Between Old and New Tax Regimes?
The tax exemptions and deductions available under the previous system should be taken into account when deciding whether the regime is preferable. You may calculate your taxable income after subtracting any deductions that apply. Your tax obligation under the old system may be computed using this net income, and the results can be compared to your tax responsibility under the new system.
It is fiscally prudent to choose the tax system that results in the lowest tax bill. It is also important to inform your employer of your choice so that they may adjust your Tax Deducted at Source (TDS) payments accordingly. You'll be able to maximize your tax deductions and personal wealth, thanks to this.
Increased Tax Rebate Limit
The threshold for a tax rebate has been amplified to a substantial Rs. 7 lakh, a notable rise from the previous Rs. 5 lakh mark in the old tax regime. This enhancement signifies that individuals earning up to Rs. 7 lakh are now exempt from paying any taxes under the new regime, a noteworthy development.
Simplified Tax Slabs
The revised tax structure introduces a more streamlined and accommodating approach to taxation. The tax exemption limit has been elevated to Rs. 3 lakhs, and the new tax slabs have been redefined.
Standard Deduction and Family Pension Deduction
Salary relief is granted to salary earners, as the Rs. 50,000 standard deduction, previously exclusive to the old regime, is now extended to the new tax scheme. This, combined with the enhanced rebate, provides a substantial Rs. 7.5 lakh in tax-free income under the new regime.
Family Pension Deduction:
Those in receipt of family pensions can benefit from a deduction of Rs. 15,000 or 1/3rd of the pension, depending on whichever amount is lower.
Surcharge Reduction for High-Net-Worth Individuals:
High-earning individuals have cause for celebration as the surcharge rate for incomes exceeding five crores has been reduced from 37% to 25%. This notable change effectively reduces their overall tax liability, with the effective rate decreasing from 42.74% to 39%.
Higher Leave Encashment Exemption:
The exemption threshold for non-government employees has seen a remarkable eightfold increase, surging from Rs. 3 lakhs to Rs. 25 lakhs. This amelioration offers substantial relief and benefits for n
Conclusion
In this blog, I tried to discuss that the new regime under section 115BAC has been made the default tax regime, and individuals or HUFs who wish to continue with the old regime will have to opt for it.
A comparison was made between the two regimes to determine which one is more beneficial for taxpayers with different levels of gross annual total income.
A break-even point analysis by a matrix is done to help readers make an informed decision on which regime to choose in order to optimize their tax outflows. Stay tuned for more updates on Union Budget 2023!
FAQs
Q1: The major amendments to income taxes under the 2023 Budget.
The Union Budget 2023 brought significant amendments to the Income Tax Structure of India. This included an increase in the tax rebate limit, a simplified tax slab system with higher exemption limits, and a reduction in the surcharge rate for high-net-worth individuals. Overall, these adjustments have created a friendly taxation environment whose key highlight includes increased allowable deductions, reductions, and exemptions to facilitate benefits for a larger population.
Q2: What is the best way of optimizing my tax savings in India under the new regime?
To optimize your tax savings under the new tax regime, consider the following strategies:
Use of the increased exemption limits and standard deductions under new taxation.
Consider scheduling your investing and spending so you can continue benefiting, under the new arrangement, from permissible deductions like home loans, insurance, medical, etc.
Structure your income so that it falls in the lower tax slabs so as to be able to understand the new tax slabs.
Stay tuned for other possible allowances and subtractions made in the coming budgets.
Talk to a financial consultant or tax expert to design personalized tax saving schemes for your particular needs.
Q3: Major Differences In Tax Planning Strategies Between The Old And New Regimes.
The main distinctions between tax planning in the old and new tax regimes are:
Deductions and Exemptions: The current regime provides broader tax exemptions as well as deductibles. The new regime provides lower deductions but compensates with higher exemption limits.
Tax Slabs: The differences are in the rates of taxation for the two countries. The old regime comprised a multiple slab system with a higher tax rate, while the new regime has a simpler slab system with a low tax rate applicable to most of the income categories.
Choice: In taxation, taxpayers can freely choose which of the two regimes to comply with, taking into account their wealth and desired goals.
Impact on High Earners: The low surcharges on the new regime make it more favorable for wealthies or high-income earners who can benefit from the increase in the exemption limit.
FAQ 4: What are the income tax changes that touch on any deductions and/or exemptions in the Union Budget 2023?
Yes, the Union Budget 2023 introduced changes to certain deductions and exemptions, notably:
Increased Tax Rebate: Income between Rs. 5 and 7 lakhs had benefited from the increased tax rebate cap of 7 lakhs as opposed to the earlier 5...
Standard Deduction: Under the new regime, the Rs. 50,000 standard deduction, and therefore an extent of tax relief, was provided.
Surcharge Reduction: Surcharge rates for a high-net-worth individual are reduced, resulting in a lowering of their actual tax rate.
Leave Encashment Exemption: Non-government employees’ leave encashment was raised very high from Rs. 3 lakhs to Rs. 25 lakhs as an exceptional case.
FAQ 5: What are the tax changes proposed by the 2023 Finance Bill in India? Are there any latest updates or news on taxation changes in India, particularly the 2023 Finance Bill?
To stay informed about the latest taxation changes and updates in India, including those in the 2023 Finance Bill, you can refer to the following sources:
Government Websites: The official website of the Income Tax Department and the Ministry of Finance has a tendency to communicate taxation changes to the public.
Financial News Websites: There are articles on budget updates and tax changes that appear on various websites like MoneyControl, the Economic Times, and Livemint.
Tax Consultants and Experts: For instance, tax experts, financial advisors, and chartered accountants will furnish you with up-to-date information and professional advice.
Finance Magazines and Journals: The importance of new tax law amendments is analyzed in articles in business presses such as Business Today and Forbes India.
Finance Apps: Through these apps, you are informed of tax-related news, updates, and calculators, which will assist in making good economic decisions via your mobile phone.
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