New Tax Regime vs. Old Tax Regime: Which One Should You Choose?
Choosing the right tax regime is crucial for optimising your income tax outflow. With the introduction of the new tax regime under Section 115BAC of the Income Tax Act, taxpayers now have two options for computing their tax liability. Each regime has its pros and cons, depending on income level, deductions, and financial goals. As a seasoned Chartered Accountant in Mumbai, I aim to clarify the nuances of both regimes to help you make an informed choice.
Overview: What Are the Old and New Tax Regimes?
Old Tax Regime: This structure allows you to claim various deductions and exemptions such as HRA, LTA, standard deduction, interest on housing loan, and deductions under Sections 80C to 80U.
New Tax Regime: Introduced in Budget 2020, this regime offers lower tax rates but removes over 70 deductions and exemptions.
Income Tax Slabs Comparison (FY 2024-25)
| Income Slab | Old Regime Tax Rate | New Regime Tax Rate |
|---|---|---|
| Up to Rs. 2.5 lakh | Nil | Nil |
| Rs. 2.5 lakh – Rs. 5 lakh | 5% | 5% |
| Rs. 5 lakh – Rs. 7.5 lakh | 20% | 10% |
| Rs. 7.5 lakh – Rs. 10 lakh | 20% | 15% |
| Rs. 10 lakh – Rs. 12.5 lakh | 30% | 20% |
| Rs. 12.5 lakh – Rs. 15 lakh | 30% | 25% |
| Above Rs. 15 lakh | 30% | 30% |
The new regime provides significantly lower rates for middle-income slabs but doesn’t permit deductions.
Which Deductions Are Available?
Under the old tax regime, you can claim:
- Standard Deduction (Rs. 50,000)
- House Rent Allowance (HRA)
- Leave Travel Allowance (LTA)
- Section 80C (up to Rs. 1.5 lakh)
- Section 80D (Medical Insurance)
- Interest on housing loan (Section 24)
- Donations under 80G
Under the new tax regime, these are not available. However, a few deductions like NPS contribution by employer (Section 80CCD(2)) are still allowed.
Key Considerations Before Choosing
1. Are You a Salaried Individual with High Deductions?
If you claim deductions exceeding Rs. 2.5-3 lakh annually, the old regime is likely better.
2. Do You Prefer Simplicity and Lower Tax Rates?
For those not claiming many deductions, the new tax regime is easier and more streamlined.
3. Income Level Matters
Taxpayers with an annual income up to Rs. 7 lakh can avail full tax rebate under Section 87A in the new regime.
4. HRA and Housing Loans
Homeowners claiming HRA and interest deductions benefit significantly under the old regime.
Example Comparison
Case A: Old Regime
Gross Salary: Rs. 12 lakh
Deductions under 80C, 80D, HRA, Standard Deduction: Rs. 3.2 lakh
Taxable Income: Rs. 8.8 lakh
Tax Payable: Approx. Rs. 85,000 (after rebate)
Case B: New Regime
Gross Salary: Rs. 12 lakh
No deductions
Taxable Income: Rs. 12 lakh
Tax Payable: Approx. Rs. 1,25,000
Conclusion: If your deductions are substantial, the old regime saves more tax.
Additional Points
- Switching Flexibility: Salaried individuals can choose the regime every year. Business owners must stick to one regime once selected.
- Form Selection: ITR-1 and ITR-2 for salaried; ITR-3/ITR-4 for business professionals.
- Documentation: New regime reduces paperwork but removes benefits that help with long-term financial planning.
Latest Updates from Government
According to the Union Budget 2023, the new tax regime is now the default option. Taxpayers need to explicitly opt for the old regime while filing returns.
(Source: Income Tax Department)
Which Regime Is Right for You?
There’s no universal answer. The optimal regime depends on your income structure, lifestyle, and financial goals. As professional Tax Consultants in Mumbai, we at Makwana Sweta & Associates help individuals and businesses assess their tax scenarios and make the right decision.
If you’re unsure which path to follow, consult a Chartered Accountant in Mumbai to analyse your eligibility and file your return correctly.