Old Regime vs New Regime: Which is Better for Salaried Employees?
If you are a salaried employee, deciding between the old and new tax regimes can impact how much tax you pay. Budget 2023 did not send much relief to the taxpayers, the Budget 2024 introduced changes that might make the new tax regime more appealing. But it all depends on the selection of tax regimes. If you opt for the new regime, the July 2024 Budget will look more appealing to you. However, if you opt for the old regime, there won’t be much difference in your tax liabilities.
This article breaks down the key points to help you choose the option that saves you the most money.
Table of Contents
Budget 2024 Updates
The 2024 Budget, presented by Finance Minister Nirmala Sitharaman, included several changes aimed at simplifying the tax system and making the New Tax Regime more attractive. Here’s a look at the main updates:
Revised Tax Slabs
The New Tax Regime saw revised tax slabs with expanded income brackets, making the tax structure more progressive:
Tax Slab for FY 2023-24 | Tax Rate | Tax Slab for FY 2024-25 | Tax Rate |
Up to ₹3 lakh | Nil | Up to ₹3 lakh | Nil |
₹3 lakh - ₹6 lakh | 5% | ₹3 lakh - ₹7 lakh | 5% |
₹6 lakh - ₹9 lakh | 10% | ₹7 lakh - ₹10 lakh | 10% |
₹9 lakh - ₹12 lakh | 15% | ₹10 lakh - ₹12 lakh | 15% |
₹12 lakh - ₹15 lakh | 20% | ₹12 lakh - ₹15 lakh | 20% |
Above ₹15 lakh | 30% | Above ₹15 lakh | 30% |
Higher Standard Deduction
The standard deduction for salaried employees has been increased from ₹50,000 to ₹75,000 under the New Tax Regime. This change provides more relief and effectively lowers taxable income, making the New Regime more competitive for salaried individuals.
Family Pension Deduction
For family pensioners, the deduction limit has been raised from ₹15,000 to ₹25,000, allowing greater relief for those receiving family pensions.
Enhanced NPS Deduction
The deduction on employer contributions to the National Pension Scheme (NPS) has been raised from 10% to 14%, offering more benefits for salaried employees under the New Regime who are looking to increase their retirement savings.
These updates indicate a government push towards simplifying tax calculations and reducing reliance on multiple deductions, which have traditionally been available under the Old Regime.
New Tax Regime for FY 2024-25 (AY 2025-26)
The New Tax Regime is designed with lower tax rates and limited exemptions, aimed at simplifying the tax filing process. Here are the updated slab rates for FY 2024-25 under the New Regime:
Income Range (₹) | Tax Rate (%) |
0 - 3,00,000 | 0% |
3,00,001 - 7,00,000 | 5% |
7,00,001 - 10,00,000 | 10% |
10,00,001 - 12,00,000 | 15% |
12,00,001 - 15,00,000 | 20% |
Above 15,00,000 | 30% |
Key Features of the New Tax Regime
Default Tax Option: The New Regime is now the default tax regime for all individual taxpayers. Taxpayers who prefer the Old Regime need to opt for it specifically when filing returns.
Higher Basic Exemption Limit: The tax exemption threshold is ₹3 lakh, applicable to all individuals, irrespective of age.
Section 87A Tax Rebate: Under Section 87A, taxpayers with income up to ₹7 lakh will have no tax liability, thanks to a full rebate.
Capped Surcharge Rate: For individuals with incomes above ₹2 crore, the highest surcharge is capped at 25%, reducing the tax burden on high-net-worth individuals.
These changes make the New Tax Regime attractive for individuals seeking simplicity and lower tax rates.
Old Tax Regime for FY 2024-25 (AY 2025-26)
The Old Tax Regime continues to be an option for those who wish to take advantage of numerous deductions and exemptions. Here’s a breakdown of the tax slabs under the Old Regime:
Income Range (₹) | Tax Rate (%) |
0 - 2,50,000 | 0% |
2,50,001 - 5,00,000 | 5% |
5,00,001 - 10,00,000 | 20% |
Above 10,00,000 | 30% |
Deductions Available in the Old Tax Regime
The Old Regime is ideal for those who make full use of eligible deductions, such as:
Section 80C: Deductions up to ₹1.5 lakh for investments in EPF, PPF, NSC, ELSS, and life insurance premiums.
Section 80D: Deduction for medical insurance premiums.
House Rent Allowance (HRA): Exemption based on rent paid and city of residence.
Leave Travel Allowance (LTA): Exemption for travel expenses incurred on leave, subject to certain conditions.
Section 80E: Deduction on interest paid for education loans.
Standard Deduction: ₹50,000 for salaried individuals.
For those with significant deductions, the Old Regime can result in substantial tax savings despite higher slab rates.
Old Regime vs New Regime: Which is Better for FY 2024-25?
Deciding between the Old and New Regimes is crucial, as it impacts your tax outflow. Here’s a detailed comparison based on potential deduction scenarios:
If Total Deductions Are Less Than ₹1.5 Lakh
In this scenario, the New Tax Regime may be more advantageous due to its lower tax rates and the enhanced standard deduction of ₹75,000. This setup often leads to a lower taxable income, making it more beneficial for those with minimal deductions.
If Total Deductions Exceed ₹3.75 Lakh
For taxpayers with deductions exceeding ₹3.75 lakh (e.g., Section 80C investments, housing loan interest, medical insurance premiums), the Old Tax Regime is likely to offer greater tax savings. The cumulative effect of deductions can substantially reduce taxable income, making the Old Regime beneficial despite higher tax rates.
If Deductions Fall Between ₹1.5 Lakh and ₹3.75 Lakh
In this range, the choice depends on your exact income level and deductible expenses. Calculating tax under both regimes for your income can clarify which option is optimal. For some, the Old Regime may yield better tax savings through available deductions, while others may find the New Regime’s lower rates favorable.
Example Calculations
Scenario 1: Taxable Income Up to ₹7 Lakh
New Tax Regime: Taxpayers with income up to ₹7 lakh are tax-exempt under the New Regime due to the Section 87A rebate. This provides a clear benefit for those at this income level.
Scenario 2: Taxable Income Above ₹7 Lakh
With Minimal Deductions: The New Regime’s reduced rates can lower the tax burden for individuals with limited deductions.
With High Deductions (₹3.75 Lakh or More): Taxpayers with significant deductions may find the Old Regime more advantageous, as deductions under Section 80C, HRA, and others can reduce taxable income considerably.
What Deductions and Exemptions Are Allowed Under the New Tax Regime?
The New Tax Regime restricts several common deductions available under the Old Regime. Here’s a summary of key deductions allowed under each regime:
Deductions & Exemptions | Old Regime | New Regime FY 2023-24 | New Regime FY 2024-25 |
Income Rebate Eligibility | ₹5 lakh | ₹7 lakh | ₹7 lakh |
Standard Deduction | ₹50,000 | ₹50,000 | ₹75,000 |
House Rent Allowance (HRA) | Available | Not Available | Not Available |
Leave Travel Allowance (LTA) | Available | Not Available | Not Available |
Section 80C Deductions | Available | Not Available | Not Available |
NPS Employer Contributions | Available | Available | Available |
Medical Insurance Premium (80D) | Available | Not Available | Not Available |
Interest on Education Loan (80E) | Available | Not Available | Not Available |
Under the New Regime, the focus is on simplified tax calculations without multiple deductions, while the Old Regime provides a broader range of deductions and exemptions.
How to Choose Between Old and New Tax Regimes?
Selecting the right tax regime can maximize your savings and simplify your tax filing process. Here’s a guide:
Estimate Eligible Deductions: Calculate your total eligible deductions under the Old Regime. If they exceed ₹3.75 lakh, the Old Regime may offer better savings.
Use Tax Calculators: Online tax calculators can quickly help you compare liabilities under both regimes.
Evaluate Financial Goals: If you’re committed to long-term investments (such as home loans, insurance, or NPS), the Old Regime might align better with your objectives.
Communicate with Your Employer: Once you decide on a regime, inform your employer so that your tax deduction at source (TDS) aligns with your choice.
Consider Loss Carryforward: If you have capital gains, losses, or income from other sources, factor them into your calculations, as these can impact your taxable income under the selected regime.
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FAQ
1. Can I switch between the Old and New Tax Regimes every year?
Yes, salaried employees can select a different regime each financial year, while business taxpayers can only make a one-time switch.
2. Is the New Tax Regime the default option now?
Yes, starting from FY 2024-25, the New Regime is set as the default option. Taxpayers need to opt for the Old Regime explicitly if they prefer it.
3. How does the Section 87A rebate work under the New Tax Regime?
The Section 87A rebate allows taxpayers with income up to ₹7 lakh to be tax-exempt, eliminating tax liability for this income level.
4. Are HRA and LTA available as deductions in the New Tax Regime?
No, common exemptions like HRA and LTA are not available in the New Tax Regime.
5. Can I claim Section 80C deductions under the New Tax Regime?
No, Section 80C deductions are only available under the Old Tax Regime. The New Regime eliminates most deductions to streamline the tax filing process.
6. How do I inform my employer about my chosen tax regime?
You need to declare your chosen tax regime to your employer at the beginning of the financial year to align TDS deductions accordingly.
7. What happens if I don’t choose a tax regime?
If you don’t choose, the New Tax Regime will be applied by default. However, you can still opt for the Old Regime while filing your return.
8. Does the New Tax Regime allow a deduction for NPS contributions?
Yes, deductions for employer contributions to NPS (up to 14% for central government employees and 10% for others) are available under the New Regime.
9. Are senior citizens required to pay taxes on pension income?
Pension income is taxable under both regimes, but senior citizens receive a higher basic exemption limit in the Old Regime.
10. Can I carry forward losses under both tax regimes?
Yes, losses from capital gains or other sources can be carried forward, but they cannot be offset with income under the New Regime.
11. Are deductions available for medical insurance premiums in the New Tax Regime?
No, deductions under Section 80D for medical insurance premiums are only available in the Old Tax Regime.
12. Is the enhanced NPS deduction available to all employees under the New Regime?
Yes, employer contributions to NPS qualify for deductions in the New Regime (up to specified limits).
13. How does the enhanced family pension deduction work?
Family pensioners can now claim a deduction of ₹25,000 (up from ₹15,000) under the New Tax Regime, providing more relief.
14. Can I take advantage of both regimes in a single year?
No, you must choose one regime for the entire financial year, although salaried individuals can change each year.
15. Is there a limit to how many times I can switch tax regimes?
Salaried employees can switch regimes annually, but business taxpayers can only switch once without reverting.
16. Are donations under Section 80G deductible in the New Regime?
No, Section 80G deductions for donations are only available under the Old Tax Regime.
17. Are education loan interest payments deductible in the New Tax Regime?
No, deductions for education loan interest under Section 80E are only available in the Old Tax Regime.
18. Will the new standard deduction benefit individuals with pension income?
Yes, the New Regime offers a standard deduction of ₹75,000, benefiting salaried individuals and pensioners.
19. Are home loan interest payments deductible in the New Tax Regime?
No, deductions for home loan interest under Section 24(b) are available only in the Old Tax Regime.
20. Is the New Tax Regime beneficial for high-income earners?
It depends on their eligible deductions. For high-income earners without significant deductions, the New Regime's lower rates may be more beneficial.
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