Comparing the Taxation Systems for Fiscal Year 2023-24: Old vs New Regime

Personal income tax has undergone considerable modifications as a result of the Union Budget 2023–24, which was unveiled in Parliament on February 1 by Finance Minister Nirmala Sitharaman. The upper limit for income tax rebates has been raised to 7 lakhs.

The 2020 Budget gave taxpayers the choice between the old tax system, which allowed for the claim of tax exemptions, and the new system, which has a lower tax rate but no exemptions. Nonetheless, the yearly income threshold up to which one did not need to pay taxes was 5 lakhs in both the previous and current tax systems. The Union Budget for 2023–2024 includes changes made to this. In her budget speech, the finance minister suggested raising the tax-free threshold under the new tax system from the current level of 5 lakhss to 7 lakhs. Those who have chosen the new tax system and earn up to 7 lakhs would not be required to pay any taxes, according to this. In addition, the tax slabs have undergone revisions, with the number of slabs being reduced from six to five. The new system would now exempt income between 0 and 3 lakhs rupees from taxes. This is an increment of 50,000 from the previous zero to 2.5 lakhs no-tax slab.

Tax Slabs and Rates: A Comparison

Difference between old and new tax regime

Income tax slab rates for FY 2022-23 (New Vs Old)

	Old Tax Regime Slab Rates for FY 2022-23			New Tax Regime Slab Rates
Slab	Resident Individuals & HUF < 60 years of age & NRIs	Resident Individuals & HUF > 60 to < 80 years	Resident Individuals & HUF > 80 years	"Before Budget 2023 (until 31st March 2023)"	"After Budget 2023 (From 1st April 2023)"
₹0-₹2,50,000	NIL	NIL	NIL	NIL	NIL
₹2,50,000 -₹3,00,000	5%	NIL	NIL	5%	NIL
₹3,00,000-₹5,00,000	5%	5% (tax rebate u/s 87A is available)	NIL	5%	5%
₹5,00,000-₹6,00,000	20%	20%	20%	10%	5%
₹6,00,000-₹7,50,000	20%	20%	20%	10%	10%
₹7,50,000-₹9,00,000	20%	20%	20%	15%	10%
₹9,00,000-₹10,00,000	20%	20%	20%	15%	15%
₹10,00,000-₹12,00,000	30%	30%	30%	20%	15%
₹12,00,000-₹12,50,000	30%	30%	30%	20%	20%
₹12,50,000-₹15,00,000	30%	30%	30%	25%	20%
>₹15,00,000	30%	30%	30%	30%	30%

Deductions and Exemptions: Old vs New Regime

Below is a comparison of the exemptions and deductions offered by the new and previous tax systems:

Particulars	Old Tax Regime	"New Tax regime (until 31st March 2023)"	"New Tax Regime (From 1st April 2023)"
Income level for rebate eligibility	₹ 5 lakhs	₹ 5 lakhs	₹ 7 lakhs
Standard Deduction	₹ 50,000	-	₹ 50,000
Effective Tax-Free Salary income	₹ 5.5 lakhs	₹ 5 lakhs	₹ 7.5 lakhs
Rebate u/s 87A	12,500	12,500	25,000
HRA Exemption	✓	X	X
Leave Travel Allowance (LTA)	✓	X	X
Other allowances including food allowance of Rs 50/meal subject to 2 meals a day	✓	X	X
Standard Deduction (Rs 50,000)	✓	X	✓
Entertainment Allowance Deduction and Professional Tax	✓	X	X
Perquisites for official purposes	✓	✓	✓
Interest on Home Loan u/s 24b on slef-occupied or vacant property	✓	X	X
Interest on Home Loan u/s 24b on let-out property	✓	✓	✓
Deduction u/s 80C (EPF\|LIC\|ELSS\|PPF\|FD\|Children’s tuition fee etc)	✓	X	X
Employee’s (own) contribution to NPS	✓	X	X
Medical insurance premium – 80D	✓	X	X
Disabled Individual – 80U	✓	X	X
Interest on education loan – 80E	✓	X	X
Interest on Electric vehicle loan – 80EEB	✓	X	X
Donation to Political party/trust etc – 80G	✓	X	X
Savings Bank Interest u/s 80TTA and 80TTB	✓	X	X
Other Chapter VI-A deductions	✓	X	X
All contributions to Agniveer Corpus Fund – 80CCH	✓	Does not exist	✓
Deduction on Family Pension Income	✓	✓	✓
Gifts upto Rs 5,000	✓	✓	✓
Exemption on voluntary retirement 10(10C)	✓	✓	✓
Exemption on gratuity u/s 10(10)	✓	✓	✓
Exemption on Leave encashment u/s 10(10AA)	✓	✓	✓
Daily Allowance	✓	✓	✓
Transport Allowance for a specially-abled person	✓	✓	✓
Conveyance Allowance	✓	✓	✓

Investment Options: Which Regime Offers Better Tax Savings?

Middle-class taxpayers who have taxable incomes up to Rs 15 lakhs can gain greatly from the new tax system. For people with high incomes, the old regime is preferable.

Those who make small investments will benefit from the new income tax system. Anybody paying taxes without claiming tax deductions can benefit from having to pay a reduced rate of tax under the new tax regime as it offers seven lower-income tax slabs. For example, under the former method, an assessee with total income before deductions up to Rs. 12 lakhs will have a larger tax burden if they have investments worth less than Rs. 1.91 lakhs. Therefore choose the new system if you don’t invest as much in tax-saving strategies.

However, if you already have a financial strategy in place for building wealth, such as investing in tax-saving instruments, purchasing life and health insurance, paying for children’s tuition, making EMI payments on student loans, or purchasing a home with a mortgage, the old tax system will benefit you because it offers higher tax deductions and a lower overall tax burden.

If taxpayers want to choose the concessional tax rates in light of the aforementioned and the new income tax regime, they may compare the two regimes. As a result, it is advised to do a comparative examination and study of both regimes before selecting the most advantageous one since it may differ from person to person.

Assessing Your Tax Situation: Which Regime is Best for You?

Because both the old and new tax regimes have advantages and disadvantages, choosing the one that best suits their needs becomes difficult for taxpayers. Below is a condensed analysis of both regimes to address some important points.

Beginning on April 1, 2020 (FY 2020–21), the Government of India adopted a new voluntary tax rate regime for individuals and the Hindu undivided family (HUF). In light of this, Section 115 BAC of the Income Tax Act of 1961 (the Act) was added, which set lower tax rates for individual taxpayers and HUFs who forwent certain tax deductions or exemptions. The new tax system has been set as the default one based on the changes suggested in the Union Budget 2023, and taxpayers must choose the previous tax regime if they want to utilize it.

The administration has announced significant modifications to the new taxation regime in order to substantially enhance it and make it more appealing to the average middle-class person. In the new tax system, the basic exemption threshold has been raised from INR 2.5 lakhs to INR 3 lakhs. Also, a tax credit on income up to INR 7 lakhs, up from INR 5 lakhs previously under section 87A.

It should be noted that the old tax system provided sufficient room for claiming deductions for a variety of allowances that are part of a salary (such as HRA, LTA, etc.) as well as for certain investments and expenses, including the National Pension Scheme (NPS), Public Provident Fund (PPF), repayment of housing loans, payment of tuition fees, etc.

On the other hand, under the new tax system, people who make up to INR 7 lakhs yearly are eligible for a full rebate and the advantage of the standard deduction. So, those with annual incomes over INR 7 lakhs must wisely select between both the new and old tax regimes. Due to the old tax system’s exemptions and lack of taxation on income up to INR 5 lakhs,

Conclusion: Which Regime Should You Choose for FY 2023-24?

The new tax regime is projected to benefit low-mid income workers (annual income up to Rs 15 lakhs) as well as those earning Rs 5 crore and above. The tax rebate has been increased from Rs 5 lakhs to Rs 7 lakhs taxable income, according to the notification.

Unlike in the previous regime, where individuals were obligated to make specific tax-saving investments such as PPF, EPF, or NPS to reduce taxable income, there are no such alternatives in the new regime. As a salaried employee, if your income is Rs 7.5 lakhs, you are eligible for a standard deduction of Rs 50,000 under the updated new tax regime. This qualifies you for a tax rebate of up to Rs 7 lakhs under the new tax structure. If your yearly income is between Rs 7.5 lakhs and Rs 15.5 lakhs, the updated new tax regime will benefit you if you are unable to fully utilise the different deductions such as sections 80C, 80D, 80E and tax exemptions such as HRA, LTA, and Section 24.

If you earn Rs 10 lakhs per year, your total deductions and exclusions must be greater than Rs 3 lakhs for the old taxation system to be beneficial to you. Otherwise, the new tax scheme as updated makes more sense. To make the former tax regime more favourable for persons with an annual income of Rs 12.5 lakhs, the total deductions and exemptions claimed must be greater than Rs 3,62,500. Otherwise, make the transition to the updated new tax structure. If your yearly income exceeds Rs 15.5 lakhs, the income tax payable in both regimes is the same as long as you claim all available deductions and exemptions under the old tax regime. If you are unable to claim certain deductions and exemptions, it is preferable to transfer to the new tax regime in order to receive a greater benefit.

Tips for Effective Tax Planning Under the New Income Tax Regime

Many commonly utilised tax deductions may be available to you based on your income and expense pattern. Then, under the old tax structure, you can still obtain nil tax liability. There are a few deductions for specific expenses and investments, such as interest on loans for affordable housing (Section 80EEA), interest on loans for electrical vehicles (Section 80EEB), interest on education loans (Section 80E), house rent allowance (Section 10 (13A), donation to exempt institutions (Section 80G), expenses for treatment of specific diseases (Section 80DDB), and deduction for disabled person (Section 80DDB) (Section 80U). To determine your eligibility for these tax breaks, you must examine your past, current, and prospective expenses and investments.

If you can keep previous qualifying deductions or are projected to become eligible for higher deductions in the future, the old tax regime may provide you with greater tax savings.

Common Mistakes to Avoid When Filing Your Taxes Under the New Regime

The majority of frequent mistakes that people make when filing their taxes can be simply avoided. Taxpayers can avoid having to make corrections later by thoroughly checking their returns. Electronic filing also aids in error prevention. Tax software performs the math, alerts taxpayers to typical mistakes, and requests any information that is lacking. Also, it can aid taxpayers in claiming worthwhile credits and deductions. Here are some mistakes to avoid:

Filing too soon– Taxpayers must not only file on time but also not too early. They should postpone filing until they are positive they have all of their tax reporting documentation in hand, otherwise, they run the risk of making an error that could cause a processing delay.

Incorrect or missing Social Security numbers– Every SSN should be entered on a tax return exactly as it is printed on the Social Security card.

Incorrect names– All taxpayers and dependents reported on the return must have names that correspond to those on their Social Security cards.

Erroneous information– To ensure they report the exact amounts, taxpayers should carefully enter any salary, dividends, bank interest, and other income they received. This includes any details that taxpayers require in order to figure out credits and deductions.

Erroneous filing status- Some taxpayers select the incorrect filing status. Information about filing statuses is provided in detail in Publication 501.

Math errors– Some of the most frequent blunders are in math. The calculations range from straightforward addition and subtraction to more difficult ones. Taxpayers should always verify their calculations. Even better, tax preparation software will automatically check it.

Calculating deductions or credits– While calculating their tax credit for earned income, child and dependent care credit, and child tax credit, taxpayers are prone to making mistakes. These credits and deductions will be computed by tax software, which will also include any necessary forms and schedules.

False information about bank accounts– Direct deposit is the preferred option for taxpayers who are due a refund. The quickest way for them to obtain their money is through this. The exact routing and account numbers must be used on the taxpayer’s tax return, though.

Unsigned documents– A tax return that is not signed is invalid. Often, a combined return requires the signatures of both spouses. Armed services personnel and other taxpayers who possess legal power of attorney may be exempt from this rule.

AMIT ARORA

I am a seasoned retail banker with over 21 years of global experience across business, risk and digital. In my last assignment as Global Head Digital Capabilities, I drove the largest change initiative in the bank to deliver the end-to-end digital program with over US$1 billion in planned investment. Prior to that, as COO for Group Retail Products & Digital, I implemented a risk management framework for retail banking across the group.