New and Old tax regime? New-tax regime is better if tax savings are below this breakeven limit

As the financial year begins, one of the pressing concerns for the salaried class is whether to opt for the old or new regime. The new regime would benefit those with fewer investments to claim, while the old regime would be more advantageous for taxpayers eligible to claim certain deductions like HRA, health insurance, home insurance, PPF, etc.

Clearly, the situation varies from person to person. To streamline the decision-making process, we have calculated the breakeven deduction limits for various income brackets. This will assist you in determining which regime would be advantageous for you. If you qualify for a deduction up to a specific threshold, your income tax liability would be identical under both the old and new regimes.

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Here's an example to illustrate the point: If you're eligible to claim a total deduction of Rs 2,37,500 (excluding the standard deduction of Rs 50,000), your tax liability will be identical under both regimes if your gross income is Rs 9.50 lakh. This indicates that if your deductions exceed Rs 2,37,500, then the old tax regime would be more advantageous for you, otherwise, the new tax regime would be the better option.

Similarly, the back-of-the-envelope calculation shows that if one considers a deduction of Rs 3.75 lakh (excluding standard deduction of Rs 50,000) the tax liability is the same for a gross income of Rs 15.5 lakh and more. For income less than Rs 15.5 lakh there are different breakeven deductions.  

Look at the table below for breakeven deduction limits for different income brackets:

Neeraj Agarwala, Partner, Nangia Andersen India explained thus: "Rs 3,75,000 is the break-even deduction for up to a gross income of Rs 5 crores. For income beyond Rs 5 crore, the new tax regime is more beneficial due to the reduced surcharge of 25 per cent (the surcharge under the old tax regime will be 37 per cent). The new tax regime will now be the default tax regime. Therefore, it is imperative, that taxpayers should compare their tax liability between the old regime and the new regime, based on the deductions available and determine which regime they would prefer to be taxed under. In the case of individuals with income (other than business & profession), this option can be exercised every year.”

The good part is tax rebate limit has been increased to Rs 7 lakh under the new tax regime. Under the old tax regime, the tax rebate limit is Rs 5 lakh. So, people having income up to Rs 7.5 lakh (standard deduction of Rs 50,000) will not have to pay taxes in the new regime.

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