Which is Better in 2024? – Forbes Advisor INDIA

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

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

Based on the amendments proposed in Union Budget 2023-2024, 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 new tax regime’s basic exemption is INR 3 lakh. The standard deduction has also increased from INR 50,000 to INR 75,000 for the Union Budget: 2024-2025. 

It is to be noted that the old tax regime has enough room for claiming deductions against various allowances forming part of salary (e.g., HRA, LTA, etc) and also for specified investments/ expenses such as Public Provident Fund (PPF), National Pension Scheme (NPS), repayment of housing loan, payment of tuition fees, etc. 

On the other hand, the new tax regime benefits from the standard deduction, and a total rebate is provided to individuals earning up to INR 7 lakh annually. So, individuals earning above INR 7 lakh annual income have to choose between the new and old tax regimes judiciously. As the old tax regime provides deductions under Chapter VI-A.

New Tax Regime Table 2024-25

• Salary income: The standard deduction of INR 50,000, only available under the old regime, has also been extended to the new tax regime. This and the rebate make INR 7.5 lakh your tax-free income under the new regime.
• Family pension: Those receiving a family pension can claim a deduction of 1/3rd of the pension or INR 15,000, whichever is lower. 
• Reduced Surcharge: For high-net-worth individuals, the surcharge rate on income over INR 5 cr has been reduced from 37% to 25%. This move will reduce their effective tax rate from 42.74% to 39%. 
• Higher Leave Encashment Exemption: The exemption limit for non-government employees has been raised from INR 3 lakh to INR 25 lakh, an 8-fold increase.
• Default Regime: Starting from FY 2023-24, the new income tax regime will be the default option. To continue using the old regime, you must submit the income tax return and Form 10 IEA before the due date.

Old Tax Regime vs. New Tax Regime: Comparison Table

Old Tax Regime Table 2023-24

Budget 2024-2025 has increased the standard deduction under the new tax regime to INR 75,000. The family pension deduction has also been increased from INR 15,000 to INR 25,000. With the revised tax structure, the taxpayer will save INR 17,500. 

List of Deductions and Exemptions Under The New Tax Regime

List of Deductions and Exemptions Under The Old Tax Regime

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

The government has taken cognizance of the fact that the Act has various exemptions and deductions which make compliance by the taxpayer and administration of the tax laws by the tax authorities a burdensome process. 

To give relief to taxpayers the simplified new tax rate regime requires specified tax deductions and exemptions to be forgone. Therefore, it is important to evaluate the impact of deductions/exemptions being claimed vis-à-vis the benefit of lower tax rates. Some of the popular tax exemptions/deductions which are not claimable under the new tax regime include:

• Leave travel allowance (LTA)
• House rent allowance (HRA)
• Children education allowance
• Minor child deduction allowance
• Interest on housing loan on the self-occupied property or vacant property (Section 24)
• Deduction for specified investments or expenses under Chapter VI-A such as:

– deduction under Section 80C towards contribution to public provident fund, repayment of principal on housing loan, children’s school fees, life insurance premium, etc.
– other deductions towards medical insurance premium, interest on education loan, etc.

Opting for the applicable tax regime 

An individual or HUF taxpayer may opt for the new tax regime based on their specific situation and sources of income. Switching between the old and new to the new tax regime can be done either on a year-on-year basis or only once. However, the frequency mostly depends on the source of income during the year.

• Where income includes business or professional income: 

In the case where an individual or HUF has income from a business or profession, once the option to avail new tax rates for a financial year has been exercised, the new rates shall apply for subsequent years. However, the law provides such taxpayers’ one single option of switching back to the old tax regime should their circumstances change.

This switch-back option is available only once in a lifetime unless the taxpayer ceases to have any income from a business or profession.

• Where income does not include business or professional income: 

If an individual or HUF does not possess income from a business or profession, the selection can be made on a year-on-year basis. For individuals with salaries, the employer is required to withhold tax before the payment of the salaries. The employee is, however, required to inform the employer regarding their preferred tax rates. 

An employee may choose between old and new tax regimes at the beginning of the year and intimate the employer, or at the time of joining new employment during the year. However, at the time of filling the personal tax return, the employee can change the tax regime. 

For example, at the beginning of the year, an employee opts for the new tax regime and the employer deducts tax based on slab rates under the new tax regime. However, during the year they make certain tax-deductible investments like contribution to provident fund, payment of medical insurance premium, etc., and at the time of filing the income tax returns (ITR), they realize the old tax regime is more beneficial to them.

In such a situation, they have the choice to opt for the old tax regime while filing the tax return though the employer had withheld taxes based on the new tax regime.

Which Tax Regime is Better?

The decision to remain in the old tax regime or to switch to the new one shall be based on the tax savings deductions and exemptions you are eligible for in the old tax regime. 

The Breakeven point is the amount at which there will be no difference in tax liability between the two tax regimes. 

Suppose your total eligible deductions and exemptions in the old tax regime are higher than the breakeven threshold for your income level. In that case, it is advisable to stay in the old regime. On the other hand, if the breakeven threshold is higher, moving to the new tax regime is more beneficial for you. 

Taxpayer 1 and Taxpayer 2 are salaried taxpayers with no other sources of income 

Let us understand which tax regime is more beneficial for both the taxpayers

Taxpayer 1

Taxpayer 2: Does not have eligible exemptions for HRA, LTA 

How To Opt For Old Tax Regime

Currently, a taxpayer with income from business or profession is required to file Form 10IE for the purpose of opting for the new tax regime. This form was introduced in October 2020.

As per the amendments proposed by the Union Budget 2023 in the new tax regime, from FY 2023-24 onwards taxpayers will be required to opt for the old tax regime and the new tax regime will be the default option. 

The manner of opting for the old tax regime will be prescribed by the tax department in due course. 

Bottom Line 

Both tax regimes hold advantages and disadvantages. 

The old tax structure uplifts taxpayers to cultivate a habit of saving, while the new tax structure favors employees with lower earnings and investments, resulting in fewer deductions and exemptions. 

The new tax regime is considered safer and more straightforward, involving fewer records and reducing the potential for tax evasion fraud. However, due to the unique nature of individual deductions and exemptions, a thorough comparison of the two regimes is necessary to determine the best fit for each employee.