Old vs New Tax Regime: Tax Slabs in India Explained

The Indian Government has introduced various incentives in the Union Budget 2023-24 to encourage the adoption of the new income tax regime. These modifications demonstrate the government's plan to gradually phase out the old system and make taxpayers adapt to the new one. The previous tax system will remain in place even though the new one is now the default. Let's examine the old vs new tax regime, and which one you should choose!

The income tax laws have undergone several revisions that took effect this financial year (FY24). Some of the significant changes that took effect on April 1, 2023, included increasing tax rebate limits, changes to income tax slabs, and the elimination of the long-term capital gains (LTCG) tax advantage for some debt mutual funds.

The quick adjustments to the income tax that will affect taxpayers in 2023–2024 are listed below:

New Income Tax Regime to be the Default Regime (from April 1, 2023)

The previous system (old regime) will remain an option for taxpayers. If you are a salaried taxpayer, the new tax system will deduct Tax Deducted at Source (TDS) depending on tax rates. Therefore, you must carefully weigh your options when declaring investments between the old regime and the new tax regime.

Income Tax Slab Changes Under the New Tax System:

Income Slab

Old Tax Regime

New Tax Regime (from April 1, 2023)

₹0 - ₹2,50,000

Nil

Nil

₹2,50,000 - ₹3,00,000

5%

-

₹3,00,000 - ₹5,00,000

5%

5%

₹5,00,000 - ₹6,00,000

20%

5%

₹6,00,000 - ₹7,50,000

20%

10%

₹7,50,000 - ₹9,00,000

20%

10%

₹9,00,000 - ₹10,00,000

20%

15%

₹10,00,000 - ₹12,00,000

30%

15%

₹12,00,000 - ₹12,50,000

30%

20%

₹12,50,000 - ₹15,00,000

30%

20%

>₹15,00,000

30%

30%

Tax Rebate Limit Raised to ₹7 lakh 

The increase in the tax rebate limit from ₹5 lakh to ₹7 lakh implies that residents with a total income under ₹7 lakh do not need to make any investments to qualify for exemptions. Their whole income is tax-free regardless of the number of investments they make. 

Say, for example, you earn ₹7.5 lakhs a year. Then you’ll have to pay 5% tax on your income between ₹3 lakh to ₹6 lakh, and 10% between ₹6 lakh and ₹7.5 lakh.

Standard Deduction

The former regime's standard deduction of ₹50,000 is carried over to the new system. The finance minister said that the standard deduction would be extended to the new tax system for pensioners. All salaried residents making ₹15.5 lakh or more will get ₹52,500 as standard deduction.

Surcharge

A surcharge is an additional tax rate imposed on businesses or high-income individuals. Usually, it is calculated as a percentage of the tax payable when the taxable income exceeds a certain limit. Under the new tax regime, the highest surcharge rate of 25%. People with income over ₹5 crore would pay a 25% surcharge rather than a 37% surcharge.

Life Insurance Premium 

From the start of the new fiscal year (or April 1, 2023), the proceeds from life insurance premiums beyond the annual premium of ₹5 lakhs are taxed.

Leave Encashment Exemption

Retiring employees sometimes receive monetary compensation for any unused leave days through a practice known as "leave encashment." The majority of countries consider this compensation to be income and tax it accordingly. This limit was ₹3 lakh since 2002 and is now increased to ₹25 lakh.

No Long-Term Capital Gain Tax Benefit on Mutual Funds

Investments in debt mutual funds were subject to short-term capital gains tax starting on April 1. With this change, Investors would lose the long-term tax advantages that had made such investments so popular.

Senior Citizen Saving Scheme

As opposed to the former deposit limit restriction of ₹15 lakh, senior individuals can now deposit up to ₹30 lakh under the senior citizens' savings plan. Also, the maximum deposit for the monthly income scheme has been increased to ₹9 lakh from ₹4.5 lakhs for single accounts. The maximum limit for joint accounts has been increased from ₹7.5 lakhs to ₹15 lakhs.

Conversion of Physical Gold to Electronic Gold Receipt to become Tax-Free

As of April 2023, converting physical gold to an Electronic Gold Receipt (EGR) or vice versa will not trigger a capital gains tax.

Which Regime Should You Choose as Per Your Income? 

Choosing between the old and new tax regimes is crucial because it affects the amount of income tax withheld from your paycheck each month by your employer. Choosing the wrong tax regime will drastically impact the income you take home.

• The new tax regime is preferable if your income is up to ₹7 lakh, as there is no tax up to this amount and an extra standard deduction of ₹50,000. 
• If you have no tax savings and deductions to claim, consider the new tax regime, as the tax rates are lower under the new scheme. By choosing the new tax regime, individuals can benefit from lower tax rates without the need to track and claim various deductions. 
• The revised new tax regime will be more advantageous for an individual who only claims a deduction of ₹1.5 lakh under section 80C because of lower rates.
• In contrast to the old tax regime, which had a maximum surcharge rate of 37%, the new tax regime's maximum surcharge rate is 25%. The new system may be more advantageous for taxpayers who fall within the highest surcharge category.

Salaried individuals (having income other than income from business and profession) have the choice of being taxed under the previous tax system or the new one. So, if circumstances change, you will have complete discretion to make changes in the next assessment year. If you prefer to calculate the tax liability by yourself, you can use the tax calculator launched by the Income Tax Department to help you make the right decision!

To read about the current income tax structure for stock market investors & traders, click here!

Disclaimer: The information given in the article is purely for educational purposes. Please do your own research or consult an income tax consultant before choosing a regime.