Which Tax System Is Better in 2023: The Old or the New?

While there are merits and demerits of both the old and new regimes, it becomes cumbersome for taxpayers to pick the best-suited tax regime. Here is a simplified assessment of both the regimes to answer a few pertinent questions.

The Government of India introduced a new optional tax rate regime starting from April 1, 2020 (FY 2020-21), for individuals and the Hindu undivided family (HUF). Consequently, Section 115 BAC was to the Income Tax Act, 1961 (the Act) that prescribed reduced tax rates for individual taxpayers and HUFs on forgoing specified tax deductions or exemptions.?

Based on the amendments proposed in Union Budget 2023, the new tax regime has been made as a default one, and the taxpayers will have to select the old tax regime if they wish to use it.

The administration has announced significant modifications to the new income tax regime in order to significantly improve it and make it more appealing to the average middle-class person. In the new tax system, the basic exemption threshold has been raised from INR 2.5 lakh to INR 3 lakh. Also, a tax credit on income up to INR 7 lakh, up from INR 5 lakh previously under section 87A.

It should be noted that the old tax system provided sufficient room for claiming deductions for a variety of allowances that are part of a salary (such as HRA, LTA, etc.) as well as for certain investments and expenses, including the National Pension Scheme (NPS), Public Provident Fund (PPF), repayment of housing loans, payment of tuition fees, etc.

On the other hand, under the new tax system, people who make up to INR 7 lakh yearly are eligible for a full rebate and the advantage of the standard deduction. So, those with annual incomes over INR 7 lakh must wisely select between the new and old tax regimes. Due to the old tax system's exemptions and lack of taxation on income up to INR 5 lakh.

Here are the differences between the old and new tax systems and what you, the taxpayer, must decide between.

Individual taxpayers will once again have the option to file their income tax returns under the old tax regime or the new tax regime in FY 2023–2024. Here are the differences between the old and new tax systems and what you, the taxpayer, must decide between.

Features of the New Tax Regime

Lower tax rates?

With seven tax slab rates ranging from 0% to 30% and the highest tax rate being applied to income beyond INR 15 lakh, the new tax regime has increased the scope of taxation. Unlike the new government, there were With five tax slab rates ranging from 0% to 30% and the lowest starting at INR 3 lakh, the new tax regime has a considerably wider scope. The old system exempts income up to INR 2.5 lakh from personal income tax, with a maximum rate of 30% being applied to income above INR 10 lakh.

With five tax slab rates ranging from 0% to 30%, the new tax system has streamlined the scope of taxation. Income up to INR 3 lakh is exempt from tax, while the maximum tax rate of 30% is applied to income beyond INR 15 lakh. The old system exempts income up to INR 2.5 lakh from personal income tax, with a maximum rate of 30% being applied to income above INR 10 lakh.

The applicable tax rates for each regime are as follows:

Deductions/exemptions to be forgone while opting for new tax regime

The Act includes a number of exemptions and deductions, which the government is aware makes it difficult for taxpayers to comply with the law and for the tax authorities to administer it.

Certain tax deductions and exemptions must be given up in order to implement the simplified new tax rate regime and provide assistance to taxpayers. Hence, it's crucial to weigh the impact of claimed deductions and exemptions against the advantage of lower tax rates. Popular tax deductions and exemptions that are no longer permitted under the new tax law include:

? Leave travel allowance (LTA)

? House rent allowance (HRA)

? Children education allowance

? Deduction for professional tax

? Interest on housing loan?

? Deduction for certain purchases or costs under Chapter VI-A, including:

1. Section 80C deductions for contributions to the public provident fund, principal repayment on a mortgage, child-related school costs, life insurance premiums, etc.
2. Additional deductions for health insurance premiums, student loan interest, etc.

Opting for the applicable tax regime

According on their unique situation and income sources, an individual or HUF taxpayer may choose the new tax system. You have the option of switching from the old to the new tax regime every year or just once. Yet, the frequency is largely influenced by the annual source of money.

? In cases where money comes from a business or a profession:

If the option to take advantage of new tax rates for a financial year has been exercised, the new rates shall apply for succeeding years in the situation where an individual or HUF obtains income from a business or profession. In the event that their circumstances change, the law gives such taxpayers a single choice to return to the previous tax system. In the absence of the taxpayer ceasing to receive any income from a business or profession, this switch-back option is only accessible once in a taxpayer's lifetime.

? In cases when income excludes professional or corporate income:

The decision may be made annually if an individual or HUF does not have revenue from a business or profession. Employers are required to withhold tax from employees' paychecks prior to paying them. Nonetheless, the employee must let the employer know what tax rates they desire.

An employee has the option to select between the old and new tax regimes at the start of the year and to notify their employer, as well as when they begin a new job during the year. The employee can, however, alter the tax regime while completing the personal tax return.

For instance, if an employee chooses the new tax system at the beginning of the year, the employer will withhold tax based on the new system's slab rates. But, they make some tax-deductible investments during the year, such as paying provident fund contributions and medical insurance premiums, and when it comes time to filing income tax returns (ITR), they realise the previous tax system is better for them. In this case, even though the employer had withheld taxes based on the new tax system, they had the option of choosing the old tax regime when filing their tax return.

Which Tax Regime is Better?

A person with an annual income of INR 9 lakh will now pay INR 45,000 in tax, or 5% of their wage. This is a decrease of INR 15,000 from the current INR 60,000 under the former slabs under the new tax regime. Also, the tax that a person earning INR 15 lakh will now have to pay is INR 1.5 lakh, down from INR 1.87 lakh.

However, it may be more advantageous if the person is qualified to claim HRA, LTA, PPF, or other deductions or exemptions under the previous tax law.

One rule cannot be applied to all since each person's eligible deductions, income sources, and amount vary. Taxpayers will need to assess and contrast the tax obligations under the two regimes before deciding which to choose.

If a taxpayer invests in tax-saving products, pays premiums for life or health insurance, children's tuition, home loan principal repayment, etc., and takes advantage of deductions for HRA, LTA, etc., it may be more advantageous to choose the previous tax system because the benefit of deduction/exemption can be used there.

For salaried individuals, the new tax law allows a standard deduction of INR 50,000 and a deduction for family pension equal to the lesser of INR 15,000 or 1/3 of the annuity.

The example below shows how two taxpayers with the same gross income can qualify for various tax breaks and exemptions.

Let's determine which tax system is better for both taxpayers.

How To Opt For Old Tax Regime?

A taxpayer who earns money from their business or profession must currently file Form 10IE in order to choose the new tax structure. It was first made available in October 2020.

Taxpayers will have to choose between the old tax regime and the new tax regime starting in FY 2023–2024, reflecting changes suggested by the Union Budget 2023 in the new tax system.

The tax department will soon provide instructions on how to choose the old tax system.

Bottom Line

Since 2014, there has not been a modification to the income tax slabs. During the presentation of the Budget 2020, Finance Minister Nirmala Sitharaman unveiled a new income tax system for the first time.

The government has now proposed a number of initiatives to move towards a simplified tax system that will benefit all taxpayers who choose the new tax regime for the fiscal year 2023–2024. The burden on taxpayers will undoubtedly be lessened by these changes to the tax slabs, which will also make it possible for people to more effectively plan for their long-term financial objectives.