Old Tax Regime Vs. New Tax Regime - Which one is better?

As the date for filing ITR is approaching, the debate between choosing the old tax regime over the default simplified new tax regime is getting heated up.

Since the tax slabs had not been changed in this interim budget announced on 1 February 2024, the tax rates, health and education cess, and surcharges remain the same for the Assessment Year (AY 2024-25).

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Having said that, the dilemma between both regimes remains as one offers exemptions and deductions which can reduce the taxable income of the taxpayer, and in turn the tax payable amount, while the other regime offers a higher tax-free income bracket but hardly any deductions or exemptions.

So, which one is to be picked? Confused?

Let’s find out.

While these are the given tax slabs, however, income up to Rs. 5.5 lakhs per annum can be tax-free under the old regime.? While, under the new regime, if you earn up to Rs. 7.5 lakhs in a year, you do not have to pay any taxes. This is because of the tax rebate available to the resident individuals and standard deductions available to the salaried employees of Rs. 50000.

The above table clearly shows that the tax slabs are limited under the old regime, while the new regime has more slabs. However, does that mean more tax savings?

Let’s find out.

The above tax payable amount is calculated on the highest amount of the slab. For instance, under the slab 5 lakh to 10 lakh, the tax amount payable of Rs. 117000 is on taxable income of Rs. 10 lakhs.

Here no deductions are taken into consideration, which you need to keep in mind.

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Now let’s look at the taxes payable on the highest amount under each slab for the new tax regime.

Looking at the table, you may think, that choosing the new regime will save you more taxes right away, but, you need to check whether you can avail of any deductions or not under the old regime and whether those deductions will help you reduce your tax liability.

However, a few things to note here is the surcharge over Rs. 5 crore is less under the new simplified tax regime which is 25% compared to 37% under the old tax regime.

How do Deductions affect tax liability?

The choice between the two regimes would depend on the amount of deductions and exemptions one can claim. If the amount of deduction is on the higher end, then the old regime will be helpful as it would reduce the taxable income of the taxpayer, and thus the tax liability will decrease. On the other hand, if the deductions are negligible, then opting for the new tax regime can be more beneficial as depicted in the above tables.

However, there can be exceptions, for instance, in the example given below, where the annual income is Rs. 2 crores, but whether the deduction is Rs. 5 lakhs or Rs. 10 lakhs, with the old regime, there can be more tax savings.

So, you need to choose the tax regime, after thoroughly evaluating which one is helping you save more taxes.

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