The recent Budget 2023 has sparked considerable uncertainty among taxpayers regarding the selection between the old and new tax regimes. In order to promote the adoption of the new regime, the government has implemented several incentives within the 2023 Budget.
These modifications clearly indicate the government's objective of facilitating taxpayers' transition to the new regime while gradually phasing out the old one. Despite the new regime being the default tax regime, the old tax regime will persist.
If you often wonder new regime vs old regime, which one is better? Let’s read on to find out more here, as the case may differ for different income slabs.
New Tax Regime
From April 1, 2020 (FY 2020-21) onwards, the Government of India introduced an optional tax rate system for individuals and Hindu undivided families (HUF). This new system, known as Section 115 BAC, was incorporated into the Income Tax Act of 1961 (the Act) and offered lower tax rates to eligible taxpayers and HUFs who did not avail certain tax deductions or exemptions.
In light of the revisions proposed in the Union Budget 2023, the new tax regime has now become the default option, requiring taxpayers to actively choose the old tax regime if they wish to continue using it.
However, individuals who opt for the new system will no longer be able to claim various exemptions and deductions, such as HRA, LTA, 80C, 80D, and others. Consequently, the new tax structure received limited support. In order to encourage taxpayers to embrace the new system, the government announced five significant adjustments in Budget 2023. These adjustments are as follows:
There is lot of confusion among taxpayers regarding the choice between the old and new tax regimes. Let’s learn difference between the tax rates of both regimes.
The government in Budget 2023 introduced 6 key changes to encourage taxpayers to adopt the new regime.
- Increase Tax Rebate Limit: Taxpayers with an income of up to ₹7 lakhs will not have to pay any tax at all under the new tax regime.
- Simplified Tax Slabs: The tax exemption limit has been increased to ₹3 lakhs.
- Introduction of Standard Deduction: The 50,000-standard deduction, previously accessible solely under the old regime, has also been extended to the new tax scheme.
- Family Pension: Those receiving a family pension are eligible for a deduction of ₹15,000 or 1/3rd of the pension, whichever is lower.
- Surcharge for High-Net-Worth Individuals Cut: The surcharge rate for income over five crores has been cut from 37% to 25%. This change reduces their effective tax rate from 42.74% to 39%.
- Higher Leave Encashment limit: The exemption limit for non-government workers has been increased eightfold, from 3 lakhs to 25 lakhs.
Old Tax Regime
The previous tax system, known as the old tax regime, was replaced by the new regime. Within this system, there are around 70 exclusions and deductions, such as HRA and LTA, that have the potential to lower your taxable income and minimize your tax payments.
One of the most significant deductions is Section 80C, which allows for a substantial reduction in taxable income of up to Rs.1.5 lakh. Furthermore, taxpayers have the choice to opt for either the existing or new tax regimes. There were no much chances have been made in Budget 2023.
What deductions and exemptions are allowed under the new tax regime?
Here is a comparison between the deductions and exemptions available under the new and the old tax regime:
From 1st April 2023 the new tax regime has been designated as the default, and taxpayers must choose the old tax regime if they decide to use it.
Both tax regimes have their pros and cons. The old system encourages savings, while the new one provides simplicity in tax computation. However, since individual circumstances vary, a thorough comparison of the two regimes is necessary to determine the best choice for each person. However, the taxpayers should carefully evaluate their circumstances and long-term financial goals to make an informed decision that aligns with their best interests.
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