Old Tax Regime vs New Tax Regime: Which One Should You Opt For FY 2022-23?

Individual taxpayers are taxed based on their income level under the Indian income tax system. A slab system establishes different tax rates for various income groups. This method of taxation helps the government establish progressive and equitable taxes.

Income Tax Slabs in India are announced by the finance minister every year. Currently, there are two different Income Tax regimes. The Union Budget for FY 2020-21 announced by Ms Nirmala Sitharaman, altered the mechanism of taxation. A New Tax Regime was implemented, which resulted in considerable reductions in tax rates as well as a major drop in tax-saving options. Consequently, Section 115BAC has been added to the Income Tax Act, 1961 which prescribed reduced tax rates for individual taxpayers and HUFs on forgoing specified tax deductions or exemptions.

The New Tax Regime, endeavours to make it easier to file Income Tax Returns (ITR). However, the Old Tax Regime is also retained, giving taxpayers the option to choose between the two tax regimes. But with this, taxpayers are left puzzled, ITR filing for FY 2022-23 is the second year, where taxpayers get to choose the best suitable option between the two tax regimes.

In the Union Budget 2022-23, Finance Minister Nirmala Sitharaman kept the new personal income tax slab unchanged. The tax season is here and you may be confused about the Old vs New Tax Regime which is better?

This article elucidates the key difference between the Old Tax Regime vs New Tax Regime and provides a better perspective on which one should you opt for.

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Old Tax Regime

Under the old taxation framework, the assessee may claim deductions, exemptions, and allowances to help them plan their taxes and save money.

Despite the high tax rates, there are various ways to reduce your tax liability. Through the addition of sections to the Income Tax Act over the years, the government has granted around 70 exemptions and deduction options to Indian taxpayers, allowing them to reduce their taxable income and thus save money on taxes.

Some exemptions, such as the House Rent Allowance (HRA) and Leave Travel Allowance (LTA), are included in your income. Deductions enable you to reduce your tax liability by investing, saving, or spending on particular items. The most popular and generous deduction is Section 80C, which allows you to decrease your taxable income by up to Rs1.5 lacs. Apart from that, several other exemptions and deductions are commonly available to taxpayers.

Advantages:

• If you are investing in tax-saving investment avenues, having a home loan to repay, an education loan, made a few donations, etc. You can avail of these deductions under Section 80C, 80E, Section 80G, and Section 24(b) among a host of other provisions of the Income Tax Act.

• The Old Tax Regime allows you several options for optimal tax-saving as well as for wealth creation, which serves the interest of your financial well-being.

• Moreover, under the Old Tax Regime for senior citizens (age 60 years and above but up to 79 years) and super senior citizens (80 years and above), there is a separate tax slab with a high base exemption limit. In the case of certain individuals, this may result in more discretionary income to help with expenses throughout their golden years.

• The old income tax regime instilled a savings culture in individuals over time by requiring investments in specific tax-saving instruments. It leads to saving for future events such as marriage, schooling, home purchase, medical, etc.

New Tax Regime

New Tax Regime offers 6 different income tax slabs and lower rates as compared to the Old Tax Regime. Multiple exemptions and deductions are not available due to the varying income slabs and tax rates.

Advantages:

• The government has not imposed any penalties for failing to convert to the New Tax Regime.

• The new tax structure allows taxpayers to invest their money without restriction. Under the new system, there are no mandated rules and regulations governing your investment pattern.

• With numerous tax slabs, you, the taxpayer, will fall into the one that best suits your annual income.

What is the difference between Old Tax Regime and New Tax Regime?

In two ways, the New Tax Regime differs from the Old Tax Regime:

- The number of tax slabs has expanded under the new system, with reduced rates in the range of Rs 15 lacs brackets.

- In the new regime, all the exemptions and deductions that taxpayers used in the old regime will be unavailable.

The government has recognised that the IT Act contains several exemptions and deductions that make compliance by taxpayers and administration of tax laws by tax authorities a time-consuming process.

Thus, some of the popular existing tax exemptions/deductions in the Old Tax Regime that are not allowed under the New Tax Regime are as listed below:

• Leave Travel Allowance 

• House rent allowance

• Standard deduction of Rs 50,000 which is available for salaried individuals

• Deductions available under Section 80TTA/TTB (on interest from savings account deposits)

• Entertainment allowance deduction and professional tax (for government employees)

• Tax relief on interest paid on home loan for self-occupied or vacant property u/s 24

• Tax-saving investment deductions under Chapter VI-A (80C,80D, 80E,80CCC, 80CCD, 80D, 80DD, 80DDB, 80EE, 80EEA, 80EEB, 80G, 80GG, 80GGA, 80GGC, 80IA, 80-IAB, 80-IAC, 80-IB, 80-IBA, etc). These popular tax-saving investment options include ELSS, NPS, PPF, the tax break on insurance premiums etc.

However, one can still claim a deduction under sub-section (2) of section 80CCD which is an employer's contribution towards an employee's account in NPS and section 80JJAA (for new employment). Also note that if the employee's contribution to EPF and NPS exceeds more than Rs 7.5 Lakh, in the financial year in question, then the employee is liable to pay tax.

Here's the list of important exemptions retained in the New Tax Regime:

• Income from Life Insurance

• Agricultural Income

• Standard reduction on rent

• Retrenchment compensation

• Leave encashment on retirement

• VRS proceeds up to Rs 5 lakhs

• Death-cum-retirement benefit

• Money received as a scholarship for education, etc.

The major difference between both tax regimes is the difference in slab rates. Given below are the various tables with the Old Income tax slab rates and the revised income tax slab rates for the FY 2022 - 23 and AY 2023 - 2024.

1. Income Tax Slab Rates for FY 2022-23 (AY 2023-24) for Individuals Below 60 Years of age, NRIs and HUFs: 

2. Income Tax Slabs FY 2022-23 (AY 2023-24) for Senior Citizen Taxpayers (above 60 years and up to 79 years):

3. Income Tax Slabs For FY 2022-23 (AY 2023-24) for Super Senior Citizens (80 years and above):

Notably, the New Tax Regime does not make a distinction between individual assesses such as non-senior citizens, senior citizens, and super-senior citizens. The tax rates mentioned above are applicable and common for all, and therefore the base exemption of Rs 2.50 lacs is irrespective of one's age.

Which Tax regime should you opt for?

You see, both the Old Tax Regime vs New Tax Regime have their benefits and drawbacks. The old system offers various exemptions and deductions under numerous sections for tax-saving purposes. On the other hand, the new system provides more flexibility and tries to simplify the process.

Although the New Tax Regime aims to provide relief to you taxpayers, but it would entirely depend on a case-to-case basis. Let us take a few examples:

Case - I

Mr X is an individual below 60 years of age (non-senior citizen) and he belongs to the higher tax bracket with a Gross Total Income of Rs 15 lacs or more. His source of income is mainly 'Income from Salary'; thus it makes sense to opt for the Old Tax Regime, wherein he can avail of the respective exemptions and deductions under the Income Tax Act, of 1961 and reduce his tax obligations.

Case - II

Mr Y is a non-senior citizen in the middle-income group earning a gross income of Rs 5 - 7.5 lacs, then the New Tax Regime may prove advantageous. This is the threshold wherein the New Tax Regime may fair better than the Old regime.

Likewise, if you are in the low-income group or you have not made any investments in tax-saving instruments and when you are unable to use the exemptions and deductions for some reason, then maybe the New Tax Regime could make sense.

Case - III

Senior Citizens aged 75 years and above are however exempted from filing income tax if their only source of income was through a pension. On the contrary, one should note that under the Old Tax Regime rebate of Rs 10,000 u/s, 87A is applicable for senior citizens if their total income is not more than 5 lacs. If opting for the New Tax Regime, no additional exemption is available for senior and super senior citizens.

As a result, choosing between the Old and New Income Tax Regimes may be influenced by a variety of factors such as current income level, income structure, and so on. Taxpayers must carefully weigh their alternatives and choose the best option between the Old and New Tax Regimes to increase their disposable income and purchasing power. However, some tax calculators allow you to compute taxes under both tax systems.

Is it allowed to switch between the Old and New Income Tax Regime every year? 

As an assessee, you have the option to choose between the Old Tax Regime and the New Tax Regime while filing your ITR in a financial year.

Given that, salaried individuals and taxpayers with income under the head house property, salary, other sources, and capital gains can choose to switch between the old and the new regime every year. However, taxpayers who have income that comes under business or profession are given only one opportunity to return to the Old Tax Regime after they go for the New Tax Regime.

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MITALI DHOKE is a Research Analyst at PersonalFN. She is an MBA (Finance) and a post-graduate in commerce (M. Com). She focuses primarily on covering articles around mutual funds including NFOs, financial planning and fixed-income products. Mitali holds an overall experience of 4 years in the financial services industry.

She also actively contributes towards content creation for PersonalFN’s social media platforms in the endeavour to educate investors and enhance their financial knowledge.