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

There is no doubt that the revised new tax regime is better than the existing new tax regime because of lower taxes and standard deduction being proposed in the Budget 2023. But the comparison is not so simple when we compare old and revised new tax regimes. This is because tax rates may be higher in the old regime but they have the advantage of deductions and exemptions which lower the tax liability. The new tax regime, on the other hand, which was first announced in Budget 2020, aim to make tax calculation easy by avoiding exemptions and deductions. In this scenario if you feel confused about what to opt for, here are 5 simple tips for quick decision-making:

1. Go for new tax regime if income is Rs 7.5 lakh and less

If your taxable income is less than Rs 7.5 lakh then go for the new income tax regime as there is no tax upto Rs 7 lakh plus you can avail a standard deduction of Rs 50,000 in the new regime. It is a straightforward option for people having income upto Rs 7.5 lakh. 

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2. Choose new tax regime if only Rs 1.5 lakh can be claimed as deduction under 80C 

There are many investments and expenditures such as PPF, insurance policies, Equity Linked Saving Scheme or ELSS, tuition fees, home loan principal, and Employee Provident Fund (EPF) that are allowed as deductions under section 80C of the Income Tax Act,1961. These deductions are subtracted from your taxable income hence reduce your tax liability. But 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. Look at the calculations below:

3. Choose the old tax regime if, apart from 80C, you can claim other deductions such as interest on home loans and health insurance 

In the case of an individual who can avail other deductions such as interest on housing loan and health insurance then the old tax regime may be more beneficial.   The back of the calculation shows that if total deductions of Rs 4.25 lakh (which includes the standard deduction of Rs 50,000, Rs 2 lakh for home loan interest deduction u/s 24B, Rs 1.5 lakh deduction under section 80C, Rs 25,000 under section 80D for health insurance) is considered, then income tax under both the old and the proposed new tax regimes is the same for a gross income of Rs 16,00,000 and above. Hence old tax regime may be beneficial for taxpayers who can claim deductions more than section 80C. The more the deductions the lower will be the tax liability under old tax regime. Look at the calculations below: 

If you can claim more than Rs 4.25 lakh as a deduction then the old tax regime is better as you can reduce your tax liability considerably by taking the advantage of other deductions such as donations under 80G, and interest on education loans under section 80E, among others.

4. If you do not have any tax-saving investments, then go for the new tax regime

In case you do not have any tax-saving investments or expenditures then certainly a new tax scheme is better to cash in on the low tax rates.