The previous tax system boasted over 70 tax deduction and exemption options, providing a significant advantage absent in the new system. Furthermore, people's natural resistance to change favored sticking with the old system. However, the government's proactive approach to promoting the new system led to several significant changes in the 2023 Budget. These modifications included adjusted tax slabs and concessional tax rates. This major move turned the spotlight on the new tax system and brought back the confusion in the tax payers’ minds—Which is the better option?
To help you solve this confusion, let’s begin by looking at the winning points of the new tax regime: • No tax on income up to Rs. 7 lakhs • Revised tax slabs with lower interest rates: o basic exemption limit raised from Rs. 2.5 lakhs to Rs. 3 lakhs o Income slab for the highest tax rate of 30% revised from Rs. 10 lakhs to Rs. 15 lakhs. • Standard deduction of Rs. 50,000 applicable. • Surcharge on income above Rs. 5 crores reduced from 37% to 25%, thereby reducing the effective tax liability of high-net-worth individuals. • Leave encashment exemption limit for non-government employees, raised from Rs. 3 lakhs to Rs. 25 lakhs • A simplified tax structure with the same tax rates for all ages and limited deduction and exemption options.
The only factor that works in favour of the old tax regime, in addition to the comfort of a ‘familiar zone’, is the multitude of deduction and exemption options that it offers. These can be used to reduce tax liability, which in some cases may exceed the tax benefits offered by the new system.
The factors that can influence the choice between the two systems are:
• Optimizing tax savings: This would be the basic consideration for any taxpayer. However, determining this requires a detailed analysis of an individual’s income, investments and expenses. Broadly, if your total deductions are Rs. 1.5 lakh or less, the new regime is more beneficial. However, if the total deductions are more than Rs. 3.75 lakh, the old regime is the better option. For deductions between Rs. 1.5 lakh and Rs. 3.75 lakh, the better option will vary as per the individual’s income.
• Time, effort and inclination: Personal finance is a broad subject, and tax saving is a minor component. While it is advisable for every earning individual to plan their finances as per life’s needs and goals, not everyone gets down to it due to a lack of time as well as inclination. However, filing income tax is mandatory, so one does not really have a choice there. The new tax regime comes with a much simpler structure as compared to the old regime, with most exemptions and deductions done away with. So, adopting the new tax regime helps eliminate the hassle of collating documents and proofs to avail tax exemption under different sections. However, those who are used to the old system may also have a natural resistance to change.
• Eventual shift to the new: The new tax regime was declared to be the default regime in the Budget of 2023. Though presently one can still opt for the old regime, eventually, one will have to make the shift. Updates and revisions will keep getting introduced over the years, making the new regime the obvious choice. It is also possible that the government might decide to completely do away with the old regime at some point in the future.
All in all, for FY 2023–24, the option to choose between the two tax systems is available. Both systems have their advantages and disadvantages. It is advisable to consult a certified tax advisor or financial consultant for a detailed evaluation of your tax liability under the two systems, and arrive at an informed conclusion regarding which system best suits your needs.
