New Tax Regime vs Old Tax Regime: Which one is better in 2024?

Under the Indian income tax system, taxes are levied on the taxpayers based on their income level. However, from 2020, there has been a change in the method of levying taxes since the announcement of a new tax regime by the Indian government. The new tax regime significantly reduced the tax rates but also drastically reduced the tax-saving opportunities. In the 2023 budget, the government incorporated many incentives to show its support for the implementation of the new tax system. 

In this article, we will discuss the differences between the old tax regime as well as the new tax regime and the differences in the deductions which are available. If you often wonder, old tax regime vs new tax regime: which one is better in 2024? Continue reading this article.

New Tax Regime

Starting April 1, 2020, GOI implemented a new optional tax rate system for the individuals and HUFs. Accordingly, Section 114 BAC was included in the Income Tax Act, 1961 for mandating lower tax rates for respective taxpayers and HUFs which didn’t claim certain tax exemptions or deductions. As per the Union Budget 2023’s revisions, the new tax regime is considered to be the default tax regime. 

Taxpayers must opt for the old tax regime if they want to use it. However, individuals that opt for the new tax regime cannot claim various exemptions and deductions which includes HRA, LTA, 80C, 80D and more. Due to this, the new tax regime has received limited support from the individuals. This is why, in Budget 2023, GOI announced 5 major adjustments to convince the taxpayers to accept the new tax regime. They are mentioned below:

• Increase in the Tax Rebate Limit: A total tax rebate has been introduced which is up to 7 lakhs. In the case of the previous tax regime, the threshold was set at 5 lakhs. This means that individuals that earn up to Rs. 7 lakhs annually do not have to pay any tax according to the new tax regime.
• Simplification of the Tax Slabs: The limit for tax exemption has been raised to 3 lakhs.
• Standard Deduction and Family Pension Deduction:
  • Salaried income: The standard deduction of 50,000 which was previously accessible only under the old tax regime has also been introduced in the new tax system. Along with the rebate, it amounts to Rs 7.5 lakhs tax free income under the new tax regime. 
  • Family Pension:  A deduction of Rs 15,000 or 1/3rd of the pension, whichever is lower, is applicable for those receiving family pension.
  • Surcharge Reduction for High-Net-Worth Individuals: For income over 5 crores, the surcharge rate has been reduced from 37% to 25%. This change had led to a reduction in their effective tax rate to 39% from the previous 42.74%.
  • Increase in Tax Exemption Limit on Leave Encashment: The leave encashment for non-government workers is exempt up to a certain limit i.e., Rs 25 lakhs. Previously, the limit was Rs 3 lakhs (since 2002) before the 2023 finance budget.

Old Tax Regime

The old tax regime was the tax system that existed before the new tax regime was implemented. The old tax regime has approx. 70 exclusions and deductions such as HRA and LTA, which can significantly reduce your taxable income and reduce the payment of taxes to the government. 

Section 80C is the most basic and crucial deduction which enables a reduction in the taxable income of up to Rs. 1.5 lakh. In addition to this, the taxpayers are provided with the choice to opt for the existing tax regimes or the new tax regimes.

List of some Exemptions and Deductions as per the Old Tax Regime Slabs

Here is a list of ‘some’ of the exemptions and deductions as per the Old Tax Regime:

• House Rent allowance
• Leave Travel Allowance 
• A standard deduction of Rs 50,000 is made available for all salaried individuals
• Deductions available under Section 80TTA/80TTB on interest earned from savings account deposits
• Entertainment allowance deduction and professional tax for government-sector employees
• Tax-saving investment deductions under Chapter VI-A (80C,80D, 80E,80CCC, 80CCD, 80D, 80DD, 80DDB,, 80EE, 80EEA, 80EEB, 80G, 80GG, 80GGA, 80GGC, 80IA, 80-IAB, 80-IAC, 80-IB, 80-IBA, etc) (Except, deduction under Section 80CCD(2)—employers contribution to NPS, and Section 80JJA) and so forth. These well-known tax-saving investment options include the National Pension System (NPS), Equity Linked Savings Scheme (ELSS), Public Provident Fund (PPF), and a tax break given on insurance premiums.
• As per sub-section (2) of section 80CCD, a deduction can still be claimed, which is basically an employer’s contribution towards an employee’s account in the National Pension System (NPS) and section 80JJAA in case of new employment.
• It is necessary to note that if the employee’s contribution to EPF and NPS crosses the limit of Rs 7.5 Lakh in the financial year in question, then such an employee will be liable to pay tax. 
• Tax relief on interest towards home loan payment for a property which is self-occupied or vacant u/s 24
• Deduction of Rs 15000 applicable for family pension under clause (ii a) (Section 57)

Old Vs New Tax Regime: Income Tax Slab

The slab for the new and the old regime is mentioned in the table below:

List of Significant Exemptions included in the New Tax Regime

Here is a list of significant exemptions which are included under in the New Tax Regime:

• Income received from Life Insurance
• Agricultural Income of an individual
• Standard reduction on rent
• Leave encashment on an individual’s retirement
• Voluntary Retirement Scheme (VRS) proceeds up to Rs. 5 lakhs
• Retrenchment compensation
• Death cum retirement benefit
• Money obtained in the form of an educational scholarship

Difference between Old vs. new Tax Regime: Which should an individual opt for?

There’s no universal answer to this question. Whether the old tax regime is better or the new tax regime is better varies from one individual to another.

The following estimates might be helpful for you to decide between the old and the new tax regimes:

• When the total deductions are less than 1.5 lakhs, the new tax regime would be a good option.
• In cases where the total deductions exceed 3.75 lakhs, the old regime would be a better option.
• When the total deductions fall between 1.5 lakhs to 3.75 lakhs: this is determined by various income levels.

Conclusion

In 2024, neither the old nor new tax regimes are ‘universally’ better. You have to choose between these two regimes depending on your income, investments and all the tax exemptions/deductions which you can avail. Most income brackets have seen a reduction in tax rate under the new tax regime. You do not have to manage deductions due to which income tax e-filing has become simpler. Under the new tax regime, the tax-free limit is Rs. 7 lakhs, which is higher than Rs. 5 lakhs in the old tax regime. However, the biggest drawback of the new tax regime is that it does not include some of the most substantial and prevalent deductions like Section 80C, 10(10D), HRA, LTA, and more, which were earlier available under the old tax regime.

By opting for the old tax regime, you can increase your savings due to tax exemptions and deductions made available under the Income Tax Act, 1961. However, you must be careful of the drawbacks that come with the old tax regime, such as more paperwork and a lower tax-free limit compared to the new tax regime.

Frequently Asked Questions (FAQs)

Q1. What is new about the ‘new’ tax regime?

A. The new tax regime was introduced in Budget 2020, and is a simplified tax structure under which individuals that are eligible for payment of taxes have to pay lower taxes. However, such individuals have to forego deductions and exemptions of the old tax regime. The tax benefits of various investments and expenses are eliminated under the new tax regime but the tax rates are comparatively lower than the old tax regime.

Q2. What is the old tax regime?

A. The old tax regime is an existing tax structure and taxpayers who opt for this tax regime can claim various exemptions and deductions. The old tax regime comes with a higher tax rate but it has approx. 70 exclusions and deductions such as HRA and LTA, which can significantly reduce taxable income of the taxpayers and also reduce the payment of taxes to the government. 

Q3. Can I switch between the old and new tax regime time and again?

A. Yes, the Indian taxpayers have the option of switching between the old and new tax regime at the time of filing their tax returns every year. However, once a taxpayer has opted for the new tax regime for a year, he is not eligible for claiming the tax benefits available under the old tax regime for the same year. If individuals with income from business have once opted for new tax regime in any of the previous fiscal years and in the current fiscal year opt for the old tax regime, they are not permitted to switch back to the new tax regime in any of the subsequent fiscal years.

Author: Dushyant Sharma

Hey there, I'm Dushyant Sharma. With the extensive knowledge I've gained in past 8 years, I have been creating content on various subjects such as banking, insurance, telecom, and all the important registration and licensing processes for various companies. I'm here to help everyone with my expertise in these areas through my articles.