Should you opt for the new tax regime or old?

Budget 2023 has made the new tax regime more attractive but it does not offer any incentive to save. 
Feb 2023
4 mins read
The adoption of new tax regime introduced in Budget 2020 has been low. To increase its appeal among taxpayers, Finance Minister Nirmala Sitharaman introduced a host of new changes under the new tax regime in Budget 2023. Let’s look at the key changes introduced under the new tax regime:
  • The rebate limit under Section 87 A has been hiked from Rs 5 lakh (tax rebate of Rs 12,500) to Rs 7 lakh (tax rebate of Rs 25,000).
  • The standard deduction of Rs 50,000 has been extended to the new tax regime.
  • The basic exemption limit has been increased from Rs 2.5 lakh to Rs 3 lakh.
  • The tax slabs have been reduced from six to five.

    Opting for the new tax regime is lucrative for those who are earning up Rs 7.50 lakh per annum. Here’s an illustration of how the tax liability becomes nil.  

    How Rs 7 lakh becomes tax-free in the new regime

Income of up to Rs 7 lakh
If you are earning up to Rs 7 lakh you do not have to pay tax under the old as well as new regime. However, if you are opting for the old regime, you will have to invest Rs 1.50 lakh under tax saving instruments under Section 80 C.

Tax slabs under old versus new tax regime 

How much tax you have to pay under the new tax regime

The above table shows that if you were earning Rs 7 lakh and had opted for the new tax regime in its earlier avatar, you would have paid Rs 33,800 tax versus nil in the proposed tax regime. The tax payable also comes down for those in the higher income slabs. 

Tax payable under different income levels in the old regime 

(Image Source: NDTV)

Old or New?
For individuals earning up to Rs 7 lakh per annum, opting for the new tax regime could be ideal. If you are earning above Rs 7 lakh per annum, you can stick to the old tax regime, provided you utilize it well with deductions and exemptions.
You will have to compare the benefits of old versus new based on your individual earnings to arrive at a conclusion.
As you can see from the above table, individuals earning Rs 15 lakh per annum are paying a higher tax (1,45,600) in the new regime as against Rs 1,06,600 in the old regime. Similarly, an individual earning Rs 12 lakh per annum is paying less tax under the old regime (Rs 75,400) as compared to the new (Rs 85,800).
One inherent advantage of opting for old tax regime is that it incentivizes you to save. This can help you save for medium to long term goals, nurturing a saving culture. On the other hand, individuals opting for new tax regime have no such incentive.
The new tax regime is now the default structure. If you don’t opt for the old regime, your tax will be calculated based on the new regime.
Opting for the old tax regime allows you to claim a host of tax exemptions under schemes/options such as Equity Linked Saving Schemes, principal sum of a home loan, Sukanya Samriddhi Scheme, National Savings Certificate, Senior Citizen Saving Scheme, National Pension System, the Atal Pension Yojana, and others.
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