Introduction to Income Tax
If you are filing your Income Tax Return (ITR) for the financial year 2023-2024, you might be thinking about which tax regime to choose. With two tax regime options available on the Income Tax website, it can be quite confusing for taxpayers like you to determine which one would be better for you in terms of tax savings. This article discusses in detail the old tax regime and the new tax regime, compares them, and provides guidance on when to choose either the old or the new tax regime.
Income Tax Basics
What does the income tax structure say? Your taxable income is determined by adding up all the income you earn each year, including your salary, rental income from a house or shop, interest income from investments, and any other additional income. The income that is taxable is taxed at different rates depending on the income bracket or slab it falls into. Each slab has its own tax rate, and the total taxable amount is calculated based on these rates. This income tax is paid to the government of India annually.
Old and New Income Tax Regime
There are two methods to determine income tax. First one is the old tax regime and the second one is the new tax regime. Until the financial year 2019-2020, there was only one tax regime, now referred to as the old tax regime. In the next financial year, i.e., 2020-2021, the government of India introduced a new tax rate system for individuals and HUFs (Hindu Undivided Families), now known as the new tax regime. Let’s compare the two tax regimes.
In the old tax regime, the government provides several exemption and deduction options. In contrast, the new tax regime offers only a few exemption and deduction options. However, both tax regimes allow for a standard deduction of 50,000 rupees. The choice of tax regime is now up to taxpayers like you. It’s important to note that selecting a particular tax regime applies for a single financial year only; it can be changed in the next financial year. However, starting from the financial year 2024-25, the default tax regime will be the new tax regime, which can be changed to the old tax regime if applicable.
Exemptions and Deductions under Old Tax Regime for Taxpayers
In the old tax regime, there are various sections available under which you can minimize your income tax by deducting it from your gross income. For instance, there is a standard deduction of 50k from your total income. For example, if your total income is 500,000 rupees, then your taxable income or net income after the standard deduction would become 4,50,000 rupees.
Exemptions and Deductions under Old Tax Regime for Taxpayers
| Sections | Limits in FY |
| Section 16 (Standard Deduction) | Rs. 50,000 |
| Section 80C (Investments and Expenses) | Rs. 1,50,000 |
| Section 80D (Medical Insurance) | Rs. 1,00000 |
| Section 80E (Education Loan) | No limit |
| Section 80G (Charity) | Specified Limits |
| Section 80TTA (Savings Account Interest) | Rs. 10,000 |
| Section 80TTB (Savings Account Interest – Senior Citizens) | Rs. 50,000 |
| Section 80GG (House Rent Allowance not in payslip) | Rs. 5,000 |
| Section 24b (Housing Loan Interest Payments) | Rs. 2,00,000 |
| Section 10(13a) House Rent Allowance in Payslip | No Limit |
Exemptions and Deductions available under the New Tax Regime
If you choose the new tax regime, then there are some tax exemption and deduction options available. They are mentioned as follows:
- Transport allowances in case of a specially-abled person
- Conveyance allowance received to meet the conveyance expenditure incurred as part of the employment
- Any compensation received to meet the cost of travel on tour or transfer
- Daily allowance received to meet the ordinary regular charges or expenditure you incur on account of absence from his regular place of duty
- Prerequisites for official purposes
- Exemption on voluntary retirement 10 (10c), Gratuity u/s 10(10) and leave encashment u/s 10(10AA)
- Interest on home loan on let-out property (section 24)
- Gifts up to Rs 50,000
- Deduction for employer’s contribution to NPS account [Section 80CCD(2)]
- Deduction for additional employee cost (Section 80JJA)
- Budget 2023 introduced a standard deduction of Rs 50,000 under New Tax Regime applicable FY 2023-24
- Budget 2023 also introduced deduction under Section 57(iia) of family pension income
Old and New Income Tax Slabs
The tax slabs for the old and new tax regimes are different. The following table gives a brief idea about these two tax regimes:
| Income Tax Range (Old Tax Regime) | Income Tax Rate (%) | Income Tax (New Tax Regime) | Income Tax Rate (%) |
| 0 – 2,50,000 | Nil | 0 – 300,000 | Nil |
| 2,50,001 – 5,00,000 | 5% | 300,001 – 6,00,000 | 5% |
| 5,00,001 – 10,00,000 | 20% | 6,00,001 – 9,00,000 | 10% |
| >10,00,000 | 30% | 9,00,001 – 12,00,000 | 15% |
| 12,00,001 – 15,00,000 | 20% | ||
| >15,00,000 | 30% |
Let’s first see the old tax regime (considering that your age is below 60 years). If your taxable income (after getting deductions) is up to 2.5 lakh then there will not be any tax on your net income. On the other hand, if your taxable income falls under 2.5 lakh to 3 lakh then there is a tax of 5% on any amount above 2.5 lakhs and below 5 lakhs.
If your income falls between 3 lakh and 5 lakhs, there will be a tax of 5% on any amount above 3 lakhs and below 5 lakhs. If your salary is between 5 lakhs and 10 lakhs, you will need to pay a tax of 20% on any amount above 5 lakhs and below 10 lakhs. And, if your income is more than 10 lakhs, then any amount above 10 lakhs will have a tax of 30%.
Tax Calculation (On the basis of old tax regime) for taxable income of 5 lakhs and 7 lakhs
Now, take a practical example. Suppose, your net annual income is 5 lakhs. According to old tax slab, there will be a tax of 5% on 2,50,000 rupees and thus the tax payable would be 12,500 rupees. And if your taxable income is 7,00,000 rupees then your total taxable amount would be 52,500 rupees. The calculation has been summarized in the table below:
| Income Tax Range (Old Tax Regime) | Income Tax Rate (%) | Net Income (5 Lakhs) | Net Income (7 Lakhs) |
| 0 – 2,50,000 | Nil | 0 | 0 |
| 2,50,001 – 5,00,000 | 5% | 12,500 | 12,500 |
| 5,00,001 – 10,00,000 | 20% | 40,000 | |
| >10,00,000 | 30% | ||
| Total tax = 12,500 | Total tax = 52,500 |
Tax Calculation (On the basis of New Tax Regime) for taxable income of 7 lakhs
| Income Tax Range (New Tax Regime) | Income Tax Rate (%) | Net Income (7 lakhs) |
| 0 – 300,000 | Nil | 0 |
| 300,001 – 6,00,000 | 5% | 15,000 |
| 6,00,001 – 9,00,000 | 10% | 10,000 |
| 9,00,001 – 12,00,000 | 15% | |
| 12,00,001 – 15,00,000 | 20% | |
| 30% | ||
| Total tax = 25,000 rupees |
If you see the old tax regime, for 7 lakhs net income, the total tax payable would be 52,500 rupees while in the new tax regime, it comes to only 25,000 rupees. On the tax slab basis, of course, the new tax regime would be a better choice. But before taking a decision, you must need to consider the tax exemption and deduction options provided by the government.
Besides, Income tax laws provide a tax rebate to residential individuals in both tax regimes. This rebate, available under Section 87A, does away with the need to pay tax if the net taxable income stays below a certain limit. Under the new tax regime, individuals like you can get a rebate of up to 25,000 making incomes up to 7 lakhs tax free. In contrast, the old tax regime offers a rebate of up to 12,500 rupees making incomes up to 5 lakhs tax free.
Surcharge:
It is an additional tax by the government on individuals that come under high-income brackets such as more than 50 lakhs.
A high-income earner choosing the new tax regime will face a lower surcharge rate. For incomes exceeding Rs 5 Crore, the rate has been reduced from 37% to 25% under the new tax regime. However, if individual subjects to the old tax regime, a surcharge rate of 37% will apply.
Surcharge rates: Old Tax Regime Vs New Tax Regime
| Income (Rs) | Surcharge rate under old tax regime | Surcharge rate under new tax regime |
| Above 50 lakhs but less than 1 Crore | 10% | 10% |
| Above 1 crore but less than 2 crores | 15% | 15% |
| Above 2 crores but less than 5 crores | 25% | 25% |
| Above 5 crores | 37% | 25% |