Choosing the Right Tax Regime: A Comprehensive Guide for Individuals!


The new and old tax regimes have been a hot topic of discussion ever since the Budget 2023 was announced. Many taxpayers are confused about which regime to choose and how it will affect their tax liability. In this blog post, we will compare the features and benefits of both regimes and help you make an informed decision.

The new tax regime was introduced in Budget 2020 with lower tax rates but fewer deductions and exemptions. The old tax regime, on the other hand, allows taxpayers to claim various deductions and exemptions but has higher tax rates. The new tax regime was optional until FY 2022-23, but from FY 2023-24 onwards, it will be the default regime unless the taxpayer opts out of it.

To provide a clearer understanding of the differences, let’s begin by reviewing the table below that compares tax rates for FY 2023-24 under both tax regimes:

Apart from the alteration in tax slabs in the new regime, Budget 2023 introduced several significant changes to the New Tax Regime, including:

  • The basic exemption limit has been increased from Rs. 2.5 lakhs to Rs. 3 lakhs (refer to the above table),
  • The tax rebate under section 87A has been increased from Rs. 12,500 to Rs. 25,000 for taxpayers with income up to Rs. 7 lakhs,
  • The standard deduction of Rs. 50,000 has been extended to the new tax regime as well,
  • The surcharge rate for income above Rs. 5 crores has been reduced from 37% to 25%,
  • The leave encashment exemption limit for non-government employees has been increased from Rs. 3 lakhs to Rs. 25 lakhs.

To make an informed decision, it is crucial to evaluate the advantages and disadvantages of each tax regime. The choice between them is influenced by factors such as income, investments, expenses, and more. To assist with this analysis, a table comparing the two regimes on key parameters is provided below:

Although both regimes offer distinct benefits and drawbacks, it’s essential to exercise caution and prevent any confusion or errors before selecting either one. Here are some precautions you should take:

  • Review your tax-saving investments and expenses under the old regime. If you have made any investments or incurred any expenses that are eligible for deduction or exemption under the old regime, you should claim them in your tax return. You cannot claim them under the new regime.
  • Inform your employer about your choice of regime before the start of the financial year. Your employer will deduct tax from your salary according to the regime you have chosen. If you do not inform your employer, they will deduct tax by default under the new regime.
  • Be aware of the switching option and its implications. You can switch between the regimes once in a fiscal year, but only if you have income from your salary. If you have income from other sources, such as business, profession, capital gains, or rent, you can switch between the regime once in a lifetime (you cannot switch between the regimes). Also, if you switch from the new regime to the old regime, you will lose some of the benefits of the new regime, such as lower tax rates and simpler compliance.
  • Keep track of your income and tax payments throughout the year. You should monitor your income from various sources and ensure that you pay advance tax or self-assessment tax on time. You should also keep all the documents and proofs related to your income and tax payments handy for filing your tax return.
  • Compare the tax liability under both regimes using a tax calculator or a professional advisor. You should choose the regime that gives you the lowest tax outgo and suits your financial goals.

Click on the button to calculate your Tax Liability.

To use the tax calculator effectively, please follow these guidelines:

  1. Basic details: Provide your basic details such as your Taxpayer status (individual), Gender, and Residential status (as a resident).
  2. Gross Salary: Enter your Gross Salary, including any additional payments like bonuses, APLI, variable, and other ad hoc incentives, and subtract any allowances exempted under both regimes or any deductions made by the company for meeting office expenses (e.g., Flexi).
  3. Exemptions: Amount deductible/exempt from Gross Salary (except standard deduction) which is not allowed in the new regime (refer to the list available on the income tax portal),
  4. Income other than Salary and Special Rate Income
  5. Interest on Self Occupied House   
  6. Deductions allowed under both   i.e. 80CCH(2), 80CCD(2), 80JJAA, family pension deduction under section 57(iia),
  7. Deductions/exemptions: Deductions/exemptions (other than those mentioned above) are not eligible in the new tax regime (e.g., section 32, 32AD, 33AB, 33ABA, Chapter VI-A, except a few and others) for a full list refer to the list available on the income tax portal.

The tax calculator will then display your gross total income, total income, tax liability, and tax savings under both tax regimes.

If you are struggling to find the best tax strategy for your investments, don’t worry. We have prepared a handy table that shows you the tax implications of different investment styles. Whether you are a buy-and-hold investor, a trader, or a hybrid of both, you can use this table to compare the pros and cons of each approach and make an informed decision. Here is the table:

Click on the button to calculate your Tax Liability

The income tax calculator and the above table are valuable tools for estimating your taxes for FY 2023-24 (AY 2024-25) and planning your investments accordingly. However, before filing your tax returns, it is advisable to seek advice from a tax expert, as there may be other factors that can impact your tax calculation.

Your decision to choose either the new or old tax regime will depend on your income level and eligibility for exemptions and deductions. It is recommended that you compare your tax liability under both regimes and choose the one that provides you with the most savings.

We hope that this blog post has provided clarity on the new and old tax regimes, enabling you to make informed decisions for your taxes. Happy Reading…. 😊

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