Old or New Tax Regime? 10 tips to choose which tax regime suits you better

As the new financial year begins, it is essential to decide between the old and new tax regime, as this choice determines how much income tax your employer will deduct from your monthly salary. Making the wrong decision can significantly affect your take-home income. If you're struggling to decide between the two options, the following ten tips can assist you in making the correct choice.

1) If you have income upto Rs 7 lakh then the new tax regime is better, as there is no tax upto Rs 7 lakh and additionally there is a standard deduction of Rs 50,000 in the new tax regime.

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2) If you have no tax savings and deductions to avail then consider going for the new tax regime, as under new scheme tax rates are lower and there is no deduction available on investments. 

Also read: Old vs New Tax Regime? Make sure which one to opt for with these 4 tips

3) If you have just 80C deduction of Rs 1.5 lakh then new tax regime might be better as back-of-the-envelope calculations show that for an individual who just avail a deduction of Rs 1.5 lakh under section 80C, the revised new tax regime would be more beneficial because of lower rates.

4) If you can avail 80C deduction and also have a home loan consider the old tax regime. This is because the old tax regime allows you a tax deduction on principal amount upto Rs 1.5 lakh under section 80C and Rs 2 lakh under section 24(b) on the interest amount for self-occupied property. The straight deduction of Rs 3.5 lakh will certainly help in reducing tax under old tax regime.

5) If you have an HRA deduction to claim, the old tax regime might be better for you. HRA deduction is only available on rent paid for residential premises and such rent does not include cost of utilities like electricity, gas etc. Generally, HRA comprises 50 per cent of the basic salary.  However, you do not get full deduction on HRA amount. It is the lowest of the following three amount a) The HRA amount received by you b) 50 per cent of the HRA amount if you live in a metro city otherwise 40 per cent, c) actual rent paid minus 10 percent of your basic salary including dearness allowance.  

6) The taxpayers under the new regime have to forgo exemptions, if they opt for the new tax regime such as Leave Travel Allowance, House Rent Allowance, Children Education Allowance, Deduction for professional tax, Interest on housing loan, among other. However, you need to know that interest paid on housing loan taken for a rented-out property can be claimed as deduction under section 24(b) in the new tax regime as well.

7) There are six income slabs now in the new regime with the increased basic exemption limit to Rs 3 lakhs from the previous limit of Rs 2.5 lakhs. In addition, the maximum rate of surcharge is 25 per cent in the new tax regime, whereas the maximum surcharge rate under the old regime was 37 per cent. The new regime seems to be more beneficial for the taxpayers falling into highest surcharge bracket.

8) NPS deduction of Rs 50,000 is available under the old regime. However, additional tax deduction u/s 80CCD (2) of Income-tax act is available to salaried taxpayers in a private sector which is restricted to Employer's NPS contribution up to 10 per cent of salary (Basic + DA).

9) Salaried individuals (having income other than income from business & profession), can change their option of being taxed under the old tax regime or the new tax regime every year. So, you have the full freedom to change next year if there is any change in circumstances.

10) Most importantly, the Income Tax Department has launched a tax calculator (https://incometaxindia.gov.in/Pages/tools/115bac-tax-calculator-finance-bill-2023.aspx) to help you make the right decision. You just need to fill in relevant details such as gross income, deductions and exemptions out tax liability and the calculator will determine which option works better for you.