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New Income Tax Regime in India: Understanding the Differences, Slabs, and Deductions

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May 5, 2023

Summary

What’s Inside

The Finance Ministry released its new Budget on the 1st of February 2023, which has put forward a new income tax regime for Indian taxpayers. Though the government plans to gradually phase out the old tax regime, taxpayers now have the choice to opt for an income tax regime that offers them a lower tax and better benefits.

To opt for the best income tax regime, you have to understand the different tax regime slabs, the differences between the income tax regimes, and the available deduction. In this blog, we will look at the differences between the old and new income tax regime offers and tax rates.

New vs old income tax regime

The government has offered many incentives and concessional tax rates to salaried individuals and senior citizens in the new tax regime. But there are some changes in the exemption and tax deduction offered in the new income tax regime. Let us look at some differences between them.

Reduced tax rates

Under the new income tax regime, there are seven income tax slab rates, and taxpayers can enjoy lower tax rates. The basic income tax exemption limit for salaried individuals is now ₹3 lakh. The exemption limit for super senior and senior citizen tax is also ₹3 lakh. The highest income tax rate (30%) will be levied on income beyond ₹15 lakh, the same as the old regime.

Under the old regime, there were five income tax slab rates. The basic income tax exemption limit for salaried individuals was now ₹2.5 lakh. The exemption limit for the super senior tax was ₹5 lakh, and the senior citizen tax was ₹3 lakh.

Higher income tax rebate limit

Taxpayers can avail a tax relief of up to ₹7 lakh under the new regime. People could only avail ₹5 lakh under the old regime.

Deduction and exemption

There are some changes in the deduction and exemption offered by the new regime. The ones available with the new regime are:

1) Standard deduction: Taxpayers can now avail a standard deduction amounting to ₹50,000 under the new regime. This was previously available only in the old regime.

2) Family pension: Recipients can now avail a deduction amounting to ₹15,000 or one-third of their pension, whichever is less.

3) Leave encashment: The limit has been increased to ₹25 lakh for private employees.

4) Home loan: Tax deduction is available for the interest of the home loan taken out for rental house property.

5) Health insurance premium: A ₹25000 deduction is available for individuals paying medical insurance premiums for themselves, spouses, and children.

Some tax deductions you can lose if you opt for the new tax regime include the following:

  • Leave Travel Allowance
  • House Rent Allowance
  • Deduction on provident fund
  • Housing Loan interest deduction
  • Education loan interest deduction
  • Professional Tax
  • Entertainment Allowance

In the old tax regime, you could opt to invest in NSC, PPG, or take out LIC policies to claim deductions. This is not available in the new tax regime.

Take-home salaries and tax outgo

Under the old regime, people were forced to invest upfront to claim certain deductions. But, in the new regime, you need not invest upfront to increase your take-home wages.

People in the higher income bracket, especially ₹10 lakh and above, can invest in long-term ventures and claim deductions under the old tax regime. This can lower their tax outgo. In the new regime, they will have to pay a flat tax rate even if they invest in some venture.

Choosing the income tax regime

It is important to consider your tax slab, the available deduction, and net taxable income before you opt for a tax regime. You can use an online income tax calculator to easily perform your tax calculation.

The new tax regime may be beneficial for salaried individuals without housing loans or uninterested in investing. People in the higher income bracket can opt for the old regime since they can claim higher deductions using investments.

Conclusion

Choosing a tax regime can feel a bit difficult. But with a comprehensive comparison between the two regimes, you can opt for one that offers you more benefits. If you are looking to invest in mutual funds to claim benefits, Fi Money can help you. Our investments are commission-free. You can choose from more than 800 direct Mutual Funds. A user-friendly design makes our app suitable for both new and experienced investors. Furthermore, Fi is completely secure because it is run by epiFi Wealth, a registered investment advisor with SEBI. You can set up recurring payments or SIPs, which can be arranged with a single-screen swipe, to invest daily, weekly, or monthly. Also, Fi provides complete flexibility with no fees for late payments.

Frequently Asked Questions

How should one decide which income tax regime to choose, an old or a new plan?

The tax regime should be selected after calculating the net taxable income, favourable deductions, and better benefits in the long term.

Can we change to the old tax regime during ITR if we selected the new regime at the beginning of the financial year? If yes, how?

Salaried individuals have the option to change their tax regime when filing ITR. They are presently obligated to inform their employers of the regime they intend to choose for the financial year 2023–24.

I want to switch my income tax regime from new to old. What should I do?

You can switch your regime from new to old when filing ITR if you had opted for the new regime at the start of the FY.

Disclaimer

Fi Money is not a bank; it offers banking services through licensed partners and investment services through epiFi Wealth Pvt. Ltd. and its partners. This post is for information only and is not professional financial advice.
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