The Indian tax landscape underwent a significant change in 2020 with the introduction of the new tax regime. The new regime did away with most deductions that were offered under the existing or old tax regime, and aimed at reducing the taxpayer’s compliance burden while also putting more disposable income in their hands.
The old regime, meanwhile, continued to offer various deductions, and helped taxpayers reduce their tax liability. But, choosing between these two regimes is a question that gets asked each year as the time for investment declaration rolls around.
To help you choose the regime that’s right for you, here is a comparison between the two tax regimes so you can understand what each of them have to offer and which one I bet suited for you.
Tax slabs and rates
The old tax regime features five tax slabs that range from 5% to 30% and each slab further has varying rates for individuals, senior citizens, and super senior citizens. For instance, taxable income higher than Rs.2.50 lakh and up to Rs.3 lakh will attract a 5% tax for individuals under 60 years of age. However, taxpayers aged between 60 to 80 years, and above 80 years falling under this income slab are exempt from tax.
The new tax regime, on the other hand, has restructured the existing income slabs for simplicity. A flat tax will be applicable to different income slabs. For instance, unlike the old regime, taxable income up to Rs.3 lakh is exempt from tax for all taxpayers.
Deductions
The old regime continues to offer various deductions, allowing taxpayers to reduce their tax liability. Some of the most commonly availed of deductions are Sec 80C (investments), 80D (health insurance premiums), 80E (education loan interest), 80G (donations), 24 (home loan interest), 80CCD (1B) (NPS contributions), 80DDB (medical treatment). It also offers a standard deduction of Rs.50,000.
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In contrast, the new regime offers limited deductions such as NPS contributions, transport allowance and rented accommodation. The standard deduction of Rs.50,000 has been retained. The fewer deductions have been put in place to simplify the process and reduce the taxpayers’ compliance burden.
Rebates
The old regime offers a rebate on income up to Rs.5 lakh. However, the new regime has increased this threshold to Rs.7 lakh.
Surcharge
This is an additional charge that is levied on the tax payable and is applicable those with a higher income. The surcharge levied in the old regime was 37% but in the new regime, it has been reduced to 25%.
Which regime should you choose?
Both regimes have their benefits and drawbacks, and choosing the one that is right for you depends on several factors like financial and tax saving goals. Both regimes have significant differences that make them suitable for different taxpayers. The old regime, with its various deductions, may be suitable for you if your goal is to reduce your tax liability. It also promotes the habit of saving. The new regime, on the other hand, offers far fewer deductions and focuses on simplifying the tax-filing process while also maximising your disposable income. If your income is on the lower side and have fewer deductions you can avail, the new regime may be more suited for you.
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Here is an illustration to help you decide the tax regime you should follow based on your income and deductions.
| Income | Ask yourself | If yes, then | If no, then |
| Up to Rs.7.5 lakh | After deductions, is your taxable income Rs.5 lakh or less? | Old regime | New regime |
| Between Rs.7.5 lakh and Rs.14.7 lakh | Can you claim 30% or higher on deductions? | Old regime | New regime |
| Between Rs.14.7 lakh and Rs.5.04 crore | Can you claim deductions greater than Rs.42.5 lakh? | Old regime | New regime |
| Above Rs.5.04 crore | After all available deductions, is old regime better? | Old regime | New regime |
