Choices on the table: Old vs new tax regime, what should you choose?

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With the arrival of the new financial year comes a challenging decision for taxpayers: whether to opt for the new tax regime or stick to the old one. The decision to opt for either the new or the old tax regime has its own advantages ad disadvantages. Income tax eats into a significant portion of taxpayers’ earnings, and every taxpayer aims to minimize this deduction. Currently, selecting the appropriate regime can significantly reduce the burden of imposed taxes for taxpayers.

The decision of choosing  between the new and old tax regimes hinges on the extent to which deductions from gross total income can reduce your taxable income. A thorough understanding of this factor will simplify and clarify the decision-making process.

Here is the difference between both tax regime-

New Tax Regime- In the Budget of 2020, a new tax regime was introduced, altering the tax slabs and offering taxpayers concessional tax rates. However, opting for this new regime meant forfeiting several exemptions and deductions, including ones for items such as HRA, LTA, 80C, 80D, and more. Consequently, the new tax regime did not attract many taxpayers.

To promote adoption of the new regime, the government made few key changes to it in the 2023 Budget. These changes aimed to make the new regime more appealing to taxpayers. Notably, these changes remained consistent for the fiscal year 24-25 as well, as no alterations were made in the Interim Budget of 2024. This stability ensured that taxpayers could rely on the benefits and incentives offered by the new regime over the mentioned period, potentially encouraging more individuals to opt for it.

Old Tax Regime-This system offers over 70 exemptions and deductions, including benefits like HRA and LTA, which can effectively decrease your taxable income and thereby reduce tax payments. Among these deductions, Section 80C stands out as one of the most popular and beneficial one, permitting a reduction of taxable income by up to Rs. 1.5 lakh. Taxpayers are provided with the option to select between the old and new tax regimes. However, the new regime was made the default tax regime, unless the taxpayer specifically opted for the old regime.

Here are a few calculations that will help you decide between the old vs the new tax regime on the basis of your income-

• If total deductions amount to ₹1.5 lakhs or less, opting for the new regime would prove advantageous. • If total deductions exceed ₹3.75 lakhs, it would be more advantageous to choose the old regime. • For total deductions falling between ₹1.5 lakhs and ₹3.75 lakhs, the decision will hinge on your income level.

At the end of the day the decision depends on the taxpayer, their income and  a good analysis about the amount a taxpayer could save while opting for either of the regime.