Old v/s New Tax Regime in Budget 2023: Which is better for you?

2 MinsApr 10, 2023

The government announced the new tax regime in the Budget of 2020. After three years of its introduction, several changes have been made to make it more beneficial for the individual taxpayer.

Old v/s New Tax Regime in Budget 2023: Which is better for you?

While there are pros and cons for both the old and new tax regimes, choosing the best option can be taxing. Since it is the beginning of the new financial year, salaried employees will have to make the choice and inform their employers of the same. However, they have the option to revise it while filing returns. Here’s an evaluation of both regimes to help you decide the one best suited for you.

Tax Slabs

As per the Indian Income Tax Law, an individual taxpayer or a Hindu Undivided Family (HUF) must pay taxes depending on the income or profits earned. The taxable income is arrived at after certain deductions (if any). The government has created specific tax slabs for different income ranges.

The Budget for 2023 made a significant announcement about the new tax regime. The Finance Minister reduced the tax slab count and the tax rates under this regime.

Let us have a glance at the tax slabs for both regimes.

Old Regime Tax SlabsOld Regime Income Rates
Up to ₹2.5 lakhNil
₹2.5 lakh to ₹5 lakh5%
₹5 lakh to ₹10 lakh20%
Above ₹10 lakh30%
New Regime Tax SlabsNew Regime Income Tax Rates
Up to ₹3 lakhNil
₹3 lakh to ₹6 lakh5%
₹6 lakh to ₹9 lakh10%
₹9 lakh to ₹12 lakh15%
₹12 lakh to ₹15 lakh20%
Above ₹15 lakh30%

Other Changes:

  • Section 87A rebate has been increased. Earnings up to ₹7 lakh annually are entitled to a rebate in the new tax regime.
  • The Finance Act 2023 has also amended provisions of section 87A of the Income Tax Act to allow marginal relief under the new tax regime. The marginal relief will be available in the new regime to resident individuals whose net taxable income exceeds Rs. 7 lacs and incremental income tax liability is higher than incremental income above Rs. 7 lacs.
  • Surcharge rate on earnings above ₹5 crores is reduced to 25% in the new tax regime.

Deductions and Exemptions

Over the years, taxpayers have been accustomed to various tax deductions and exemptions under the old regime. Tax deductions can be deducted from your income, whereas exemptions are excluded from taxation. Although they benefit taxpayers, the calculation, compliance and administration can be arduous for some, especially young professionals.

Thus, the new tax regime aims to give the taxpayers respite by forgoing these deductions and exemptions.

Also Read: [Understand your tax liability with Budget 2023]

Some tax exemptions and deductions not allowed under the new tax regime are:

  • House Rent Allowance (HRA)
  • Leave travel allowance (LTA)
  • Children’s education allowance
  • Deduction for professional tax
  • Interest on housing loan
  • Deduction under Section 80C
  • Deduction under Section 80D

The new tax regime abandons the deductions and exemptions of the old regime and only allows a standard deduction of ₹50,000 for salaried individuals and pensioners. And also deduction under section 80 CCD(2) (i.e. Employer contribution to National Pension Scheme)

Note: Evaluate the impact of giving up on deductions and exemptions compared to the benefit of lower tax rates.

Choosing the right Income Tax Regime

The old and the new tax regimes have their benefits and drawbacks. The old regime provides various avenues to reduce taxable income through deductions and exemptions. On the other hand, the new regime is flexible, with a simple tax calculation process. Since the source and quantum of income and usage of deductions and exemptions differ for every individual, evaluating both options is necessary before opting for one.

If you, as a taxpayer, pay high premiums on life and health insurance, have a good amount of investments in tax-saving instruments, or avail of HRA and LTA deduction benefits, the old regime might benefit you. But on the other hand, the new tax regime may be better for individuals and those who do not utilise the deduction and exemption benefits and once who maybe benefitted with lower surcharge.

Let us look at two different scenarios to understand the difference in both tax regimes:

Scenario 1:

Amit, who works for an MNS, earns ₹20 lakh per annum as his salary. He doesn’t have any other source of income and avails deduction u/s 80C. The details for FY 2023-24 are as follows:

ParticularsOld Tax RegimeNew Tax Regime
Gross Total Income₹20,00,000₹20,00,000
Total Deduction (Sec 80C)₹1,50,000₹0
Taxable Income₹18,00,000₹19,50,000
Tax on Total Income₹3,52,500₹2,85,000
Rebate u/s 87A₹0₹0
Health & Education Cess (4%)₹-14,100₹-11,400
Total Tax Payable₹3,66,600₹2,96,400

If Amit opts for a new tax regime, he will save up to ₹70,200.

Scenario 2:

Mohit works in a bank and earns a salary of ₹10,00,000 per annum. He has put his money across varied financial instruments, and thus deductions and exemptions play a role in calculating his tax liability.

The details for FY 2023-24 are as follows.

ParticularsOld Tax RegimeNew Tax Regime
Gross Total Income₹10,00,000₹10,00,000
Deduction u/s 80C₹1,50,000₹0
Deduction u/s 80CCD(1B)₹50,000₹0
Deduction u/s 80D₹75,000₹0
Standard Deductione₹50,000₹50,000
Taxable Income₹6,75,000₹9,50,000
Tax on Total Income₹-47,500₹-52,500
Rebate u/s 87A₹0₹0
Health & Education Cess (4%)1,900₹2,100
Total Tax Payable₹49,400₹54,600

If Mohit opts for the old tax regime, he will save up to ₹5,200.

Bottom Line

Since FY 2023-24, the government has made the new tax regime the default option for individual taxpayers and HUF. Every fiscal year, an individual or Hindu Undivided Family (HUF) must select between the old and new tax regimes. If they do not have any business income, this is applicable.

Individual taxpayers and HUFs with business income are eligible to choose the new income tax regime. However, once they opted in, they will only have a once in a lifetime opportunity to return to old tax regime.

The old regime offers several deductions and exemptions for individuals through various investment avenues like ELSS, PPF, Mediclaim, principal repayment of Home loan, etc.

On the other hand, the new tax regime is designed keeping in mind new investors and the youth who have just begun their careers and have limited earnings and investments and offers easier tax computation it also offers lower surcharge to high-income earning tax payers. Select the right one for you, based on your needs and requirements.

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.