Old personal tax regime vs new tax regime: Choosing made easy here

New Delhi: To encourage adoption of the new tax regime, the government announced several changes in the Union Budget for 2023-24. The budget proposed to allow tax rebate on income up to ₹7 lakh under the new regime, compared to ₹5 lakh offered under both the old and new income tax regimes.

The government also proposed to reduce tax slabs to five from six, and hike the tax exemption limit from ₹2.5 lakh to ₹3 lakh. To encourage more assesses to switch to the new regime, the budget also proposed to introduce a ₹50,000 standard deduction, which was so far available only under the old regime.

The new tax slab rates that will be applicable from 2023-24 in the new tax regime are: up to ₹3 lakh -nil; from ₹3 lakh to ₹6 lakh – 5%; from ₹6 lakh – ₹9 lakh – 10%; from ₹9 lakh - ₹12 lakh – 15%; ₹12 lakh to ₹15 lakh – 20% and above ₹15 lakh – 30%.

The new income tax regime is also set to become the default regime from the FY2023-24.

When paying taxes under the new regime, one has to forego most of the deductions/exemptions including those under section 80C (maximum of ₹1.5 lakh) that can be claimed by investing in specified financial products, section 80D for health insurance premium paid; exemption for house rent allowance and leave travel allowance.

While the old tax regime allows deducting such amounts from the total income, the higher tax rates lead to higher tax liability. At present, there are fewer tax slabs under the old tax regime: There is no tax on income up to ₹2.5 lakh. Income of ₹2.5–5 lakh is taxed at 5% (with tax rebate), ₹5– 10 lakh at 20% and that above ₹10 lakh at 30%.

Choosing between the old and new tax regime depends on the total amount of deductions and exemptions each individual is availing in the old tax regime.

We tried to simplify this by reaching a breakeven amount for each income level (see GFX) for a salaried person aged below 60, which can be used to choose between the two tax regimes.

Breakeven threshold

To put it simply, if the aggregate amount of deductions and exemptions that you are eligible to claim under the old tax regime is more than the breakeven threshold that matches the income level, then you would be better off sticking to the old tax regime. Otherwise, it is beneficial to move to the new tax regime.

At the breakeven amount, there would be no difference in the tax liability between the two tax systems.

For example, if your gross total income is ₹12 lakh per annum and tax-breaks amount of ₹3.5 lakh (See GFX), your tax liability under both the regimes would be same, which is ₹82,500. However, if the total tax-break amount is lower than ₹3.5 lakh, your tax liability under the new tax regime would be lower than in the old tax regime.

Note that the above breakeven limit includes the standard deduction of ₹50,000 which is now available for taxpayers under both the regimes.

The selection of the tax regime would be straightforward for those with a total income of up to ₹7.5 lakh per annum. Budget 2023 hiked the maximum rebate under 87A from ₹12500 to ₹25000 under the new tax regime. Thus, those with income up to ₹7.5 lakh will not have to pay any tax under the new regime.

The math is simple even for those with total income of ₹15.5 lakh and above. If the total of tax breaks is more than ₹4.25 lakh, the tax liability under the old tax regime would be lower. If deductions are lower than ₹4.25 lakh, the new regime would be better.

Having said that, the equation reverses for high-net-worth individuals with gross total income of more than ₹5 crore per annum. Budget 2023 slashed the surcharge rate applicable to this category of individuals from 37% to 25%. As a result, the marginal tax rate comes down to 39% from 42.7% (including surcharge and cess). But this is only for those in the new tax regime. Thus, it is worthwhile for individuals