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As a salaried person, do you find it hard to decide between the old and new tax regimes for the upcoming assessment year 2024–25?

This detailed guide breaks down every aspect to help you make a choice that fits your financial goals and saves you the most money on taxes. Find out about the key differences, tax rates, and case studies to help you understand how the income tax regime works. 

Let us first understand the basic difference between the two tax regimes.

(1) Basic Tax Exemption limit

(2) Tax Rebate under section 87A  

(3) Tax Rates

Under the Old Tax Regime

Under the New Tax Regime

Total income on which no tax is payable: Presumption vs Reality

Be happy if your total income under the old tax regime does not exceed Rs 5,00,000/- or under the New Tax Regime does not exceed Rs.7,00,000/-. Up to those limits, in normal situations, after the set off of the tax rebate (under section-87A), no tax remains payable and therefore, it is presumed that the total income up to Rs. 5,00,000/- under the old regime and Rs. 7,00,000/- under the new regime is exempt from income-tax. 

However, the above presumption is not correct, in a case where the total income includes income chargeable to tax at special rates- such as short term capital gain from the sale of listed equity shares, which is charged at 15% (Section 111A), Long term capital gain from the sale of listed equity shares, which is charged at 10% (Section 112A), and long term capital gain from the sale of other assets, which is charged at 20% (Section 112). 

In the above situation, as the tax payable on total income exceeds the tax rebate, the tax shall be payable even if the total income under the old tax regime is up to Rs 5,00,000/- and the new tax regime is up to Rs.7,00,000/-. This is due to the fact that the amount of tax rebate under the old tax regime has been prescribed at a tax rate of 5% applicable for the total income between Rs 2,50,000/- to Rs 5,00,000/- (5% of 2,50,000 = Rs 12,500) and under the new tax regime, a tax rate of 5% applicable for the total income between Rs 3,00,000/- to Rs 6,00,000/- and a tax rate of 10% applicable for the balance of Rs 1,00,000/- (5% on 3,00,000, Rs 15,000/- and 10% on Rs 1,00,000/-,Rs 10,000 = Rs 25,000/-). 

In other words, do not think that "no tax" is always payable on total income up to Rs 5,000,000/- under the old tax system and up to Rs 7,000,000/- under the new tax system.

What do you think about the choice of tax regime after going through tax rates under two tax regimes?

The New Tax Regime is beneficial, as the tax rates are lower and the basic exemption limit is higher by Rs. 50,000/-. 

Do you think what you said is correct?

Your observation is correct If you are- 

• Not eligible for any exemption under Section 10, 
• Not eligible for deductions under Chapter-VIA, 
• Not eligible for deduction of interest in respect of a loan taken for a self occupied residential house, and
• No income is charged at special rates 

The same becomes clear from tax benefits, tax savings, or tax concessions under the new tax regime in certain instances tabulated below: -

The minimum tax saving, tax benefit or tax concession of Rs 1,17,000 /- shall be available on total income exceeding Rs 15,00,000/- too. 

However, your observation may not be correct if you are

• Eligible for exemptions such as house rent allowance under Section 10(13A), 
• Leave travel allowance under Section 10(5) or 
• Eligible for deductions under Chapter- VIA such as investment in PPF, GPF, or NPS, insurance policies under Section 80C, for interest on educational loans under Section 80E, health insurance and medical expenses under Section 80D, and 
• Eligible for deduction of interest on the loan taken for the purchase of your self occupied house under Section 24(b). 

Let’s understand with a case study:

Rakesh is an employee of an ABC company. His estimated gross salary for Financial Year 2023–24 (Assessment Year 2024–25) is Rs 15,50,000/-. As per the investment declaration made by him, in Form 12BB to his employer, he is eligible for the following exemptions and deductions: 

• HRA Exemption u/s 10(13A)- Rs 1,00,000
• Deduction under Section-80C Rs 50,000
• Deduction u/s 80CCD(1) on NPS contribution Rs 1,00,000
• Deduction u/s 80CCD(2) on NPS contribution Rs 1,00,000
• Deduction u/s 80E- Education loan interest Rs 50,000
• Deduction u/s24(b): Interest for self-occupied house: Rs 2,00,000

Rakesh is eligible for exemptions and deductions aggregating to Rs 6,00,000/- as above, If he opts for the old tax regime. Further, he is eligible for standard deduction of Rs 50,000/- under Section 16. 

Considering the above exemptions and deductions (Rs. 6,50,000/-) taxable total income of Rakesh under the old tax regime will be Rs 9,00,000/-, on which tax payable including health and education cess, works out to Rs 96,200/-.

However, if Rakesh opts for the New Tax Regime, he will not be eligible for the above exemptions and deductions except the deduction of the employer’s contribution in the NPS of Rs 1,00,000/- and the standard deduction of Rs 50,000/- [Section 115 BAC(2)]. Accordingly, his taxable total income under the new tax regime will be Rs 14,00,000 [Rs 15,50,000 (-) Rs 1,50,000]. The tax payable, including cess, under the new tax regime shall be Rs 1,35,200/-. 

If you choose the right option, you can save tax up to Rs 39,000/- (the old tax regime) , and if you choose the wrong option (the new tax regime), you might lose money worth Rs 39,000/-. Choosing the right tax regime depends on whether you save or lose your money. 

Some More Tips for right choice

• If total income is Rs 15,00,000/- to Rs 5,00,00,000/- and tax deductions and exemptions are more than Rs 3,75,000/- , the old tax regime is beneficial. The situation may change, if Rs 3,75,000/- includes the employer’s contribution under NPS.
• If total income is Rs 15,00,000/- to Rs 5,00,00,000/- and tax deduction and exemptions are lower than Rs 3,75,000/-, Taxes have to be computed under both tax regimes to know which one is beneficial 
• If total income is up to Rs 15,00,000/- compute tax under both tax regimes and check under which tax liability is lower.

Be careful- think before filing your Income-tax Return

• From the financial year 2023–24 (Assessment Year 2024–25), ‘New tax regime’ is the ‘default tax regime’, If you want to go out it, the option needs to be exercised 
• Even if you have selected the ‘new tax regime’ before the employer, you still have the option to change the tax regime at the time of filing return of income under Section 139(1).

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Disclaimer:

The article is only for educational purposes, covering limited aspects of relevant provisions of the Income-tax Act. The relevant provisions of the Income-tax Act may be referred to, for complete understanding.