Budget 2023: What’s the difference between old tax regime and new tax regime?

The Finance Ministry introduced its new income tax regime during the Budget 2020, in order to smoothen the process of taxpaying. The 2020 regime, known as the 'Simplified Tax regime,' offered reduced tax rates, with options to forego some deductions and exemptions during income tax calculations. Here's a close look at both regimes -- the old and the new one -- and which one is more suitable.

1.    The old tax regime 

If one looks at the old tax regime, the tax rates are higher when compared to the new tax regime. But the old regime offers a number of deductions or tax exemptions such as house rent allowance (HRA), leave travel allowance (LTA) tax exemptions, Section 80C, 80 D deductions, etc. 

The biggest section for deduction for tax-paying individuals is Section 80C, by which one can reduce the taxable income by Rs 1.5 lakh in one go.  

Besides, the old regime also offers breathers as tax deductions on your loans, like home and education, to premiums you pay for health insurance. 

Exemptions	Deductions
House Rent Allowance	Public Provident Fund
Leave Travel Allowance	ELSS (Equity Linked Saving Scheme)
Mobile and Internet Reimbursement	Employee Provident Fund
Food Coupons or Vouchers	Life Insurance Premium
Company Leased Car	Principal and Interest component of Home Loan
Standard Deduction	Children Tuition Fees
Uniform Allowance	Health Insurance Premiums
Leave Encashment	Investment in National Pension Scheme
	Tuition fee for Children
	Saving Account Interest

2.    2020 tax regime 

The new income tax regime has a number of better points. Like it offers lower income tax rates to reduce the tax burden on total income. It also eliminates the requirement to maintain proof of investments/ expenses incurred by the salaried taxpayer. 

Besides, the tax slabs, by which the income tax is calculated, have increased. The new regime offers lower rates in the sub-Rs. 15 lakh range.  

Also, the exemptions and deductions offered under the old regime have been totally removed. 

Applicable exemptions under the new system:  

• Interest received on Post Office Savings Account under Section 10(15)(i) the maximum amount of Rs. 3,500.  
• Gratuity received from employer up to a maximum amount of Rs. 20 Lacs. 
• Amount received from Life Insurance Policy on maturity under Section 10(10D). 
• Employer contribution in NPS or EPF up to 12 per cent of salary and interest on EPF up to 9.5 per cent p.a.  
• Income from Life Insurance. 
• Income from agricultural farming. 
• Standard reduction on rent.  
• Retrenchment compensation. 
• Leave encashment on retirement. 
• VRS proceeds up to Rs 5 lacs. 
• Retirement cum death benefit.  
• Money received as a scholarship for education.  
• Interest and maturity amount of PPF or Sukanya Smriddhi Yojna. 

Old regime vs 2020 regime 

Both systems have pros and cons. The one major difference is revised slab rates. The income tax individuals pay is based on a slab system in India, which is made taking into account the average income of the individuals.  

So, for the income segments up to Rs 15 lakh, the new tax regime has proposed lower income-tax rates, but only if the person is ready to give up the exemptions and deductions available under various provisions of the Income Tax Act.  

Income level (slab)	Old tax rate regime*	New tax rate regime
Up to 2,50,000	0%	0%
2,50,001 to 5,00,000	5%	5%
5,00,001 to 7,50,000	20%	10%
7,50,001 to 10,00,000	20%	15%
10,00,001 to 12,50,000	30%	20%
12,50,001 to 15,00,000	30%	25%
Above 15,00,000	30%	30%

 

This means individuals opting for the new regime will have let go of some exemptions including Leave Travel Allowance (LTA), House Rent Allowance (HRA), and deductions available including Insurance Premium payout and Savings Account Interest under chapter VI A of the IT Act Section 80 such as 80C, 80CCC, 80CCD, 80D, 80DD, 80E, 80EE, 80G, 80GG, 80GGA, 80GGC, etc. 

Advantages 

1.    A note by Canara Bank and HSBC Bank states that India's gross savings rate was approximately 30 per cent in March 2019 and domestic savings was a significant contributor to the overall rate.  

This was mainly because, the old income tax regime helped promote savings for any future eventuality like marriage, education, purchase of house property, medical exigency, etc. by enforcing investments in specified tax-saving instruments like ULIPs, which over a period inculcated the savings culture in individuals.   

2.    On the other hand, the 2020 regime offers reduced tax rates and compliances. As most of the exemptions and deductions are not available, tax filing becomes simpler as there is lesser documentation required.  

3.    Moreover, the reduced tax rate provides more disposable income to people who could not invest in specified instruments due to certain financial or personal reasons.  

4.    Therefore, the new regime offers increased liquidity in the hands of the taxpayers. 

Also read: Union Budget 2023: The Finance Ministry should simplify and rationalise personal tax laws