Drawing a Comparison between Old and New Income Tax Regime

Ashish M. Shaji

10 Sep, 2022

With the commencement of the new income tax regime, as a taxpayer you may be confused about which one is better among the Old and new income tax regime. To know which regime of the two is beneficial to the taxpayer, you may have to carefully analyse and compare them. In this article, we will have an analysis of the two tax regimes.

Applicable tax rates under old and new tax regime

Old and New Income Tax Regime: What differentiates the two?

The new tax regime differs from the old in two ways. The new tax regime has more slabs with lower rates and the exemptions and deductions on offer for taxpayers in the old tax regime shall not be available if the new tax regime is chosen by a taxpayer.

One of the major difference between these two regimes is that the slab rates are different. In India, taxpayers have to pay income tax based on the slab system. The tax slab is made by taking into account the average income of the individuals. This means that the taxpayers having high income will be liable to pay more income tax.

Another notable difference between the two is the option to lower the tax. No deduction shall be permitted under the new tax regime, which is available in the older one. Through deductions, taxpayers can reduce the amount of tax.

Should you decide to opt for the new tax regime, then do check out this list of exemptions and deductions that as a taxpayer you will have to give up:

• Leave travel allowance exemption;
• House rent allowance;
• Standard deduction of 50000 rupees;
• Deduction available under Section 80TTA/TTB;
• Deduction for entertainment allowance & employment/professional tax (section 16);
• Tax benefit under section 24 on the interest paid on housing loan;
• Rs. 15000 deduction allowed from family pension (Section 57 clause (iia));
• Deduction claimed for medical insurance premium (Section 80D);
• Tax benefits for disability (Section 80DD and Section 80DDB);
• Tax break on the interest paid on education loan (Section 80E) and tax break on donations made to charitable institutions;
• Deductions available under Chapter VI-A (Sections 80C, 80CCC, 80CCD, 80D, 80DD etc.

These deductions and exemptions cannot be claimed by taxpayers^[1] opting for new income tax regime however, deduction under sub-section (2) of sections 80CCD & 80JJAA can still be claimed.

Old and New income tax regime: Pros and Cons

Both income tax regimes have its own pros and cons. They have been illustrated below:

Old Regime- Pros and Cons

• Inculcates the habit of savings;
• Investment servings as a source of passive income;
• Beat inflation through investment;
• Less disposable income;
• Less choices for tax-savings investment;
• Lock-in period of investment hits liquidity;
• Hassle in retaining the proof of claimed deductions.

New Regime- Pros and Cons

• Reduced tax rates and less compliances;
• Increased disposable income;
• Increased liquidity;
• Increased flexibility in making objective based investment portfolio;
• Can’t claim various tax deductions and exemptions;
• As there are no exemptions, the total taxable amount will be more as compared to in the old tax regime;
• No automatic mechanism of encouraging saving habit;
• Lower flexibility in opting the new tax regime for those with business income.

Which tax regime to opt for?

There is no specific answer to this as the decision whether to opt for new tax regime or not depends upon a variety of factors like current income, income composition, savings habit, among other factors.  An individual should work out their tax liability under both regimes before deciding which one is more beneficial for them.

As illustrated above, both the tax regimes have its advantages and disadvantages. Hence if you are interested in claiming deductions and exemptions, you may opt for the old tax regime however you should conduct a comparative analysis and evaluation before you proceed any further. Among the younger population, new tax regime has many takers as they do not have many tax-saving investments.

Switching between the two

Now there may be a confusion among people whether one can switch between the two tax regimes multiple times. Well, if you are a salaried individual, you may switch every year. This means that the “Individuals with income under the Head- ‘Salary’, ‘House Property’, ‘Capital Gains’ & ‘Other Sources’ may choose to switch every year between the two tax regimes however those individuals deriving income from business or profession can revert to old tax regime only once after they opt for the new tax regime.

Takeaway

Going theoretically, the new tax regime offers lower tax rates and involves less complications but one cannot avail the exemptions and deductions illustrated in the above points. Having said that the choice remains subjective.  

Read our Article:Income Tax Refunds for AY 2021-22: 1.5 Crore Refunds Issued