Budget 2023: Compare New vs Old Tax Regime for Best Option

Finance Minister Nirmala Sitharaman has released the first Budget for Amrit Kaal 2023-24, which promises to be a budget like no other. While continuing the plans outlined in the previous Budget, Sitharaman outlines a plan for promoting sustained economic growth for the next 25 years as India aims to reach its centennial milestone.

The Indian economy remains strong despite not yet reaching pre-pandemic levels of growth. The Union Budget aims to maintain stability and improve business conditions by changing tax laws and promoting agriculture, cooperatives, MSMEs, tourism, and green development. Capex is crucial for growth and employment, with increased spending of INR 10 lakh crore (33%) proposed.

The tax proposals aim to simplify the system and support MSMEs and startups while improving compliance. Indirect tax proposals prioritize the government’s “Make in India” initiative to boost domestic manufacturing, focusing on green energy and mobility. The GST amendments align with the GST Council recommendations and allow data sharing with other systems. However, there was no mention of the OECD’s Global Minimum Tax in the Budget.

Difference between New vs Old Tax Regime

The new tax regime introduced in the Budget 2023 has altered the income tax slabs, thereby altering the point of equivalence between the old tax regime and the revised new tax regime for salaried individuals, senior citizens, and super senior citizens.

The break-even point refers to the maximum deduction that must be claimed under the old tax regime to have equal income tax liability in both regimes. This serves as a means to assist individuals in determining which tax regime would be more beneficial if they cannot fulfil the required deductions.

Key Notes Under Budget 2023-24 Tax Slabs

1. The personal income tax rebate limit has been increased to INR 7 lakh, i.e., individuals earning up to this amount annually will not be required to pay any income tax under the new tax regime.
2. The new tax regime will be the default option for citizens, with the option to choose the old regime, which offers benefits such as deductions for PPF and NPS contributions.
3. Individuals earning above INR 7 lakh annually will have to weigh the benefits of each regime to make an informed decision. The new regime includes the introduction of a standard deduction.
4. The highest income surcharge rate has been reduced from 37% to 25%, reducing the maximum tax rate to 39%.
5. The limit for tax-exempt leave encashment has been raised from INR 3 lakh to INR 25 lakh.
6. Individuals earning INR 15.5 lakh and above will now be eligible for a standard deduction of INR 52,500 under the new tax regime.

Calculation Per Budget 2023-24

Example 1: If your annual income is INR 7,00,000, then you are not required to pay taxes under the new tax regime 2023-24. However, under the old tax regime, the slab was INR 5,00,000.

Example2: If your annual income is INR 10,00,000, you will be taxed under the new tax slabs:

1. Up to INR 3,00,000 – No Remaining tax balance: (INR 10,00,000 – INR 3,00,000) = INR 7,00,000

[The balance will be taxed under (INR 6,00,000 – INR 9,00,000) at 10.00%]

1. INR 7,00,000 * 10.00% = INR 70,000

Pros of Old Tax Regime

The Union Budget 2023 has maintained the old tax regime’s existence while presenting several changes. A preliminary estimation indicates that it may be possible for individuals to achieve a higher level of tax savings under the old tax regime as compared to the new changes proposed in the budget, considering the continued presence of deductions and exemptions that are not available in the new tax regime.

Various exemptions and deductions are available under the old regime, which has grown significantly over time, and taxpayers now have over 70 benefits to decrease their taxable income.

Cons of the Old Tax Regime

Although there are advantages to the Old Tax Regime, it is vital to be aware of the potential drawbacks which may be present.

• One of the main limitations of the old regime is the lock-in period associated with tax-saving investments. This can affect an individual’s liquidity as they may need help accessing the invested funds when needed. The investment commitments also limit an individual’s current level of consumption.
• Another limitation of the old regime is that only a limited number of tax-saving investments are available. This should offer more flexibility for taxpayers to choose the investment options that suit their financial goals and risk preferences.
• Finally, there may be better choices than the old tax regime for individuals with either no transactions or only a few transactions that are eligible for tax deductions. Taking advantage of these deductions may not outweigh the benefits of the new tax regime.

Pros of New Tax Regime

• The Budget 2023 presented several benefits for the commoner, including an increase in the rebate under section 87A from INR 5 lakhs to INR 7 lakhs in the new tax regime and lower taxes under the new tax slabs.
• The deposit limit for senior citizens’ savings schemes has been doubled, and a new saving scheme for women has been introduced.
• The budget also focuses on infrastructure development, with a capital expenditure of INR 10 lakh crore, and maintains the fiscal deficit target.
• The rural sector and MSMEs receive support with increased allocation for PM Awas Yojna and a revised credit guarantee scheme for MSMEs with an investment of INR 9,000 crore.
• The ease of doing business is improved with reduced compliances and decriminalized legal provisions, and the budget prioritizes green growth with a capital investment of INR 35,000 crore towards energy transition. No change was made in the long-term capital tax gain.

Cons of New Tax Regime

• The exemptions and deductions present in the old regime are not available in the New Tax Regime. The only advantage offered in the New Regime is the standard deduction of Rs 50,000, which is also present in the Old Regime.
• The new tax regime is being pushed as the default, and the old tax regime did not receive any upgrades. This is a negative for insurance companies as the deduction incentive for insurance premiums will no longer be attractive, reducing the sales of large-ticket policies.
• The budget also did not introduce new sectors to the production-linked incentives scheme, which was expected to boost manufacturing.

What Should You Choose: Old Tax Regime vs New Tax Regime?

As the tax liability of each individual is determined by their specific deductions, sources, and amounts of income, a universal rule cannot be imposed. Therefore, taxpayers must analyze their tax obligations under both the old and new tax regimes and make an informed decision on which to choose.

The new tax regime, introduced in the Budget of 2023-24, reduces the tax rate for individuals and HUFs. It also eliminates deductions and exemptions on investments, such as interest on home loans, medical and educational expenses, etc.

If an individual holds investments in tax-saving instruments, pays premiums for life or medical insurance, incurs expenses for their children’s education, repays home loan principal, and claims deductions for HRA and LTA, among others, it may be more advantageous to opt for the old tax regime, as it allows for the utilization of deductions and exemptions.

On the other hand, The new regime benefits those who want to pay less tax and don’t want to claim deductions. Hence, if the income falls in the lower tax slab and deductions are unavailable, it is better to opt for the new tax regime.

In Conclusion

In conclusion, the choice between the new and old tax regimes in Budget 2023 depends on the individual’s specific financial situation and income sources. Both regimes have their benefits and drawbacks, and it is crucial for taxpayers to thoroughly evaluate their tax liability under each system before making a decision.

Factors such as investments in tax-saving instruments, premium payments, and deductions claimed should be considered. Ultimately, it is recommended to seek the advice of a financial advisor or utilize an Income Tax calculator to determine which regime best suits your financial needs and objectives.