Old vs. New Tax Regime: Making the Right Choice for Salaried Individuals
Choosing between the old tax regime and the new tax regime under Section 115BAC can be confusing for salaried individuals. Each system has its benefits and drawbacks, and the right choice depends on your financial goals and tax-saving habits. This blog provides a detailed comparison, explains the tax implications, and helps you decide which regime works best for you.
What Are the Old and New Tax Regimes?
Old Tax Regime
The old tax regime follows the traditional tax slabs with rates increasing as your income rises. However, it allows taxpayers to claim various deductions and exemptions, including:
- Section 80C: Investments in instruments like PPF, ELSS, or life insurance premiums (up to ₹1,50,000).
- HRA Exemption: For salaried employees living in rented accommodations.
- Standard Deduction: ₹50,000 for salaried individuals.
New Tax Regime (Under Section 115BAC)
Introduced in FY 2020–21, the new tax regime offers concessional tax rates but requires taxpayers to forgo most exemptions and deductions.
Tax Rates Comparison
| Income Slab (₹) | Old Tax Regime Rates | New Tax Regime Rates |
|---|---|---|
| 0 – 2,50,000 | Exempt | Exempt |
| 2,50,001 – 5,00,000 | 5% | 5% |
| 5,00,001 – 7,50,000 | 20% | 10% |
| 7,50,001 – 10,00,000 | 20% | 15% |
| 10,00,001 – 12,50,000 | 30% | 20% |
| 12,50,001 – 15,00,000 | 30% | 25% |
| Above 15,00,000 | 30% | 30% |
Key Differences Between the Old and New Tax Regimes
| Aspect | Old Tax Regime | New Tax Regime |
|---|---|---|
| Tax Rates | Higher rates | Lower rates |
| Deductions Allowed | Yes (e.g., 80C, 80D, HRA) | No |
| Standard Deduction | ₹50,000 | Not applicable |
| Flexibility for Savings | Promotes tax-saving investments | Suitable for taxpayers without investments |
How to Choose Between the Old and New Tax Regimes
- For Taxpayers Claiming Deductions: If you have significant tax-saving investments or expenses (like insurance premiums, PPF, or home loans), the old tax regime may result in lower taxable income.
- For Taxpayers Without Deductions: If you don’t have investments or deductions, the new tax regime may provide a simpler and lower-tax alternative.
- Use a Tax Calculator: To make an informed decision, calculate your taxes under both regimes using an online income tax calculator.
Examples
Example 1: Taxpayer With Deductions
- Annual Income: ₹10,00,000
- Deductions Under 80C: ₹1,50,000
- Standard Deduction: ₹50,000
- Taxable Income (Old Regime): ₹8,00,000
- Tax Payable (Old Regime): ₹85,800
- Tax Payable (New Regime): ₹78,000
In this case, the old regime is more beneficial due to deductions.
Example 2: Taxpayer Without Deductions
- Annual Income: ₹10,00,000
- No Deductions
- Taxable Income: ₹10,00,000
- Tax Payable (Old Regime): ₹1,17,000
- Tax Payable (New Regime): ₹78,000
Here, the new regime offers greater savings.
Frequently Asked Questions
1. Can I switch between the old and new tax regimes every year?
- Yes, salaried individuals can opt for a regime annually while filing their tax returns. However, business income taxpayers can only switch once.
2. Does the new regime have any deductions?
- The new tax regime doesn’t allow popular deductions like 80C or HRA, but employer contributions to the National Pension Scheme (NPS) under Section 80CCD(2) remain exempt.
3. Which regime is better for higher-income earners?
- For higher-income earners with significant investments, the old regime is typically advantageous. However, it depends on individual financial habits.
Conclusion
Choosing between the old tax regime and the new tax regime depends on your financial priorities and savings strategy. Use the tax-saving options of the old regime if you invest regularly or have high eligible expenses. If you prefer a simpler system without deductions, the new regime may suit you better. Evaluate your finances carefully to make the best choice!