Our Finance Minister, MS. Nirmala Sitharaman, recently revealed the New Tax Policy in the Budget of 2023. Since the announcement, many taxpayers have been attempting to determine which taxation regime will provide them with the most significant benefits.
It becomes challenging for taxpayers to select the most advantageous tax regime as both the old and new tax regimes have benefits and drawbacks. Taxpayers must specify whether they want to use the old tax system in the upcoming fiscal year because the new tax system is now the default. Otherwise, everyone’s income will be determined using the proposed new tax system.�
Here is a condensed evaluation of both approaches to addressing some critical issues. Due to the lower taxes and standard deductions proposed in Budget 2023, the revised new tax regime is undeniably better than the current tax regime.�
Major Highlights of the New Tax Policy
The following are some of the major highlights of the new tax regime of 2023.�
1. The tax rebate limit has been increased.�
In the recent budget, the government has increased the Tax rebate limit to ?7 lakhs vis a vis the previous limit of ?5 lakhs. This means that people earning less than 7 lakhs per year can apply for exemptions without making any investments. No matter how many investments they make, seven lakhs are tax-free.
They will not be required to invest in any tax-saving schemes as they did earlier. This also states that they will have more disposable income and purchasing power. The government’s new initiative will greatly help middle-class people, who frequently struggle to save money due to the high cost of living. These taxpayers will now have more money to spend on other necessities, like healthcare, education, etc.
2. Reduction in the number of tax slabs
The New Tax structure has adopted a five-slab approach. The tax exemption limit has been raised to Rs. 3 lakhs. This was done to simplify the tax structure and reduce the burden of taxation on citizens. The New Tax slab is given Below
| Tax Slab (In Lakhs) | Tax % |
| 0-3 | 0 |
| 3-6 | 5 |
| 6-9 | 10 |
| 9-12 | 15 |
| 12-15 | 20 |
| Above 15 | 30 |
3. Benefits to Salaried Individuals and Pensioners
The new Budget Policy ensured that the pensioners would be eligible for the standard deduction. Each salaried worker making at least fifteen lakh rupees per year will gain ?52,500 rupees. As a result, retirees can deduct up to ?52,500 from their taxable income when filing their tax returns, which will increase their savings. Pensioners will undoubtedly benefit greatly from the finance minister’s decision because it lowers their tax burden and enables them to keep more of their hard-earned money. Furthermore, unlike in the previous tax regime, pensioners who choose the new tax regime will be unable to claim deductions such as 80C and HRA.�
4. The maximum tax, including the surcharge, has been reduced.
The highest tax rate in our nation is 42.74 percent. This is one of the highest tax rates imposed anywhere in the world. This high tax rate makes it more difficult for people to save and invest, while also making it difficult for businesses to expand and create jobs. The highest surcharge rate would be reduced from 37% to 25% under the new tax structure, bringing the overall rate down to 39%. This decrease will make our nation more enticing to foreign investors, who might be turned off by higher tax rates. Pensioners who opt for the new tax structure will still benefit significantly despite the loss of these deductions.
5. Encashment of leave
Last but not least, the ?30,000 pm maximum basic pay in the government at the time that the 3-lakh limit for tax exemption on leave encashment at the retirement of non-government salaried employees was last set was 30,000 per month in 2002. The increase to Rs. 25 lakhs reflects the increase in government salaries. This would ensure that no salaried employee, regardless of salary, would have to pay tax on leave encashment upon retirement. Higher-income earners, who were unable to take advantage of the full exemption because of their relatively higher salaries, would particularly benefit from such a change.
Which is the Better Option: Old Tax Regime or New Tax Regime?
- Many people find it time-consuming to claim deductions and exemptions and keep records. With the New Tax Regime, the government intends to reduce the compliance burden. If you want to keep your tax planning as simple as possible, the New Regime is the way to go. You do not have to worry about making tax-saving investments or optimizing your salary to lower your tax bill.
- If you want to stay in the Old Regime, you must make a request to your employer. The new tax regime nullifies many tax exemptions and deductions, which is among the major differences between the old and new taxation policies. However, the government has promised to offset this increase by lowering tax rates.�
- If, on the other hand, you do not mind the compliance as long as you save the most tax, you will need to thoroughly compare the two options before making a decision. The government promises simplicity in tax planning with the New Tax Regime.�
- The exemptions and deductions available under the Old Regime are no longer available under the New Regime. Under the previous regime, an individual was exempt from paying tax if their taxable income, after deductions, was less than ?5 lakhs. The tax rate for those earning between ?3 lakhs and ?6 lakhs has remained constant at 5%.
- Under the New Regime, if the taxable income is less than ?10,000, the entire income is tax-free. Meanwhile, the new tax regime had a lower tax rate, but there were no exemptions. The tax-free threshold has been raised to ?7 lakhs, but only for those who opt for the new tax regime.
- The new tax regime’s tax slabs have also been modified. The tax-free threshold has been increased by 50,000. Income of up to 3 lakh rupees will no longer be taxed. Previously, the basic tax exemption limit was 2.5 lakh. Furthermore, the number of slabs in the new regime has been reduced to five.
- The advantage of the old Tax Regime is that, over time, the list of exemptions and deductions available has grown. Taxpayers can now take advantage of over 70 benefits to reduce their taxable income. These exemptions and deductions can help taxpayers reduce their tax liabilities and keep more of their earnings.
FAQs on Old Tax Regime VS New Tax Regime
Here are some FAQs about the old and new tax regimes.�
Should one opt for the new tax regime?
The new tax regime is beneficial if you are claiming a tax exemption of up to 2 lakhs, including standard deduction. Then the new tax regime is truly beneficial. But this calculation is different for every individual.�
What is the major drawback of the New Regime?
If any individual is saving a lot on taxes through deductions like LTA and HRA, then the old tax regime is more beneficial, as the new tax regime does not offer these exceptions.
What types of tax relief are available in both income tax systems?
The rebate amount under Section 87A has been changed. Once the income is over 5 lakhs, one needs to forgo the rebate of Rs 12,500 that is given. Beginning April 1, 2023, the new structure will provide a Rs 25,000 rebate if taxable income does not exceed Rs. 7 lakh.�
The old tax regime will continue to provide a Rs 12,500 rebate.
What happens if a salaried individual does not clarify that they prefer the old tax regime?
In case a salaried person does not specify that he chooses to stay with the old regime, their employer will deduct taxes on salary income based on the new tax regime by default beginning April 1, 2023. It should be noted, however, that once a regime has been chosen, it cannot be changed during the fiscal year. The individual can, however, choose any regime while filing income tax returns.
Do I have to file an Income Tax Return if my annual income is less than Rs 2.5 lakh?
Only if your total annual income exceeds the maximum exempt amount of two and a half lakh is it necessary to file an ITR.�
The New Tax Regime is the default regime. For salaried employees, this means that your employer will deduct your taxes following the new regime. The change in the tax-free threshold is part of the government’s effort to reduce the overall tax burden on individuals and businesses. The new tax regime marks a clear shift towards a more progressive approach, with the tax burden distributed fairly across income groups.�
Furthermore, the government anticipates that by making the tax system more transparent and straightforward, the new tax regime will increase tax compliance. It also aims to reduce the tax burden on the majority of its taxpayers. The changes made do not make things easier for you.
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