The Union Budget 2023–24 made some changes to the new tax regime, which was introduced in the Union Budget 2020. The changes were made to make it more attractive and simpler for taxpayers. Some people still prefer the old way of paying taxes because they can’t save money with deductions and exemptions under the new regime.

The government made the crucial changes to the new tax regime and made it the default choice, offering some benefits to attract people. In short, the government wants everyone to pay taxes in a new way. Moreover, the government wants everyone to switch to the new way of paying taxes and eventually get rid of the old way.

Now tax paying citizens are confused about which way is better for them: new or old?

Here are the changes the government made to the new tax regime to make it more appealing:

• You don’t have to pay any tax if you earn up to 7 lakhs instead of 5 lakhs in the old tax regime.
• You also get an extra Rs. 50,000 tax deduction that you didn’t get before. This means you can earn up to Rs. 7.5 lakh without paying any tax under the new tax regime.
• The tax brackets are wider. The highest tax rate is for income above 15 lakhs, while it was 10 lakhs in the old regime.
• You pay less extra tax if you earn more than Rs. 5 crores. The extra tax is 25% instead of 37% in the old tax regime.

The suitability of the tax regime depends on how much money we can save with the tax deductions from both regimes. Let’s do some math for different income levels and compare the taxation in both tax regimes.

The following would be taxes in the new tax regime for various income levels:

To calculate tax under the old tax regime, let us presume that an individual is savvy with deductions and exemptions and avails of the standard deduction of Rs. 50,000. He can also get a deduction of Rs. 1.5 lakh under Section 80C, Rs. 25000 under Section 80D, and Rs. 50000 under the National Pension System (NPS). So the total tax deduction is Rs. 2.75 lakh.

The following would be taxes in the old tax regime for various income levels:

You can see that in most cases, the new tax regime is better.

But what if you also get a 2-lakh deduction for home loan interest the old way? That makes your total deduction 4.75 lakhs. Then the comparison looks like this:

You can see that the old way is still good for all income levels if you use all the deductions you can.

This is what we learned from the comparison:

• If you save less than Rs. 2 lakhs with deductions, the new way is better.
• If you save between Rs. 2 lakh and Rs. 4.75 lakh with deductions, it depends on your income.
• If you save more than Rs. 4.75 lakh with deductions, the old way is better.
• If you earn more than 5 crores, the new way is better because you pay less extra tax.

There are also other ways to save money with deductions like the House Rent Allowance (HRA), interest on education loans, employer contributions to the NPS, and so on. These make the old way even more attractive.

We recommend that you get help from a professional tax consultant or chartered accountant to find out the best option for you.

Thank you

Akhil Bhardwaj

Partner

Alpha Capital