Old vs. New Income Tax Slabs for FY 2022-23 – Which one is Beneficial for You?

2023 Budget: Old vs. New Tax Rules

Each year, the Indian government unveils its budget, which outlines various economic policies and taxpayer relief measures. Among the budget’s critical components are the income tax slabs, which dictate the amount of tax individuals owe on their income. For the fiscal year 2023-24, these tax slabs have undergone significant changes compared to the previous year. In this blog, we will explore the same, both the old vs. the new regime, and analyse which income tax regime offers greater advantages for you.

Understanding the New and Old Tax Regimes

The 2023 Budget, presented by Finance Minister Nirmala Sitharaman, introduced several changes to the tax regime. This move threw the public into an ‘old tax regime vs. new tax regime’ debate. Let’s take a look:

New Tax Regime

In the New Tax Regime, introduced in the 2020 Budget, tax slabs changed, offering lower rates. However, it limited exemptions and deductions, reducing its popularity. Budget 2023 introduced key changes:

• Higher Tax Rebate Limit: Income up to ₹7 lakhs is now tax-free, compared to ₹5 lakhs in the old regime.
• Streamlined Tax Slabs.
• Standard Deduction: ₹50,000 deduction is now available in both regimes, making ₹7.5 lakhs tax-free.
• Reduced Surcharge: Reduced from 37% to 25% for income over ₹5 crores.
• Leave Encashment Exemption: Raised to ₹25 lakhs for non-government employees.

Starting FY 2023-24, the new regime becomes the default option, with the choice to switch annually.

Old Tax Regime

In contrast, the Old Tax Regime, before the new regime, offered over 70 exemptions and deductions, including Section 80C, reducing taxable income up to ₹1.5 lakh. Taxpayers can choose between the old and new regimes.

So if you like simple tax planning, go for the new regime. But if you are ready to tackle complex tax rules to maximise savings, compare both regimes before deciding.

Difference Between New Regime and Old Regime

Here is a simple comparison between the old and new tax slabs:

Difference between new regime and old regime
Tax Slab (₹)	Old Tax Regime Rates	Tax Slab (₹)	New Tax Regime Rates
0 – 2.5 lakhs	0%	0-3 lakhs	0%
2.5 lakhs – 5 lakhs	5%	3 lakhs – 6 lakhs	5%
5 lakhs – 10 lakhs	20%	6 lakhs – 9 lakhs	10%
10 lakhs & above	30%	9 lakhs – 12 lakhs	15%
		12 lakh – 15 lakhs	20%
		15 lakhs & above	30%

• The new tax system has more tax categories and lower tax rates compared to the old one. In the recent budget, the finance minister introduced six different tax categories or “slabs.” These slabs have tax rates of 0%, 5%, 10%, 15%, 20%, and 30%.
• Unlike the old system, the new one does not offer various exemptions and deductions. The only benefit available in both the old and new regimes is the standard deduction of Rs 50,000.
• Under the old tax system, if your taxable income (after considering all deductions) is less than Rs 5 lakh, you do not need to pay any tax. However, in the new regime, your entire income will be tax-free if your taxable income is under Rs 7 lakh.

Comparison of old and new income tax regimes

The Old Tax Regime involves higher tax rates but provides various ways to lower tax liability through exemptions and deductions. These options include over 70 benefits, such as HRA, LTA, and Section 80C deductions, allowing taxpayers to reduce taxable income significantly.

Conversely, the New Tax Regime offers lower tax rates overall but introduces an additional 35% tax slab for incomes exceeding Rs 20 lakhs. It simplifies the tax structure by removing numerous exemptions and deductions, resulting in a streamlined system. Taxpayers can choose between these regimes based on their preferences and financial circumstances. Here are some common exemptions and deductions availed by taxpayers.

Deductions	Exemptions
Public Provident Fund	House Rent Allowance
ELSS (Equity Linked Saving Scheme)	Leave Travel Allowance
Employee Provident Fund	Mobile and Internet Reimbursement
Life Insurance Premium	Food Coupons or Vouchers
Principal and Interest Component of Home Loan	Company Leased Car
Children Tuition Fees	Standard Deduction
Health Insurance Premiums	Uniform Allowance
Investment in NPS	Leave Encashment
Tuition Fee for Children
Saving Account Interest

Utilising a combination of exemptions and deductions has the potential to substantially reduce your taxable income, contingent upon your eligibility for specific benefits. However, it also necessitates strategies for optimising your salary to minimise annual tax expenses.

Old vs new tax regime: Which income tax regime is better?

A simple guide to choosing between old vs new income tax regimes:

Unfortunately, there’s no one-size-fits-all answer due to the complexity of Indian tax rules. But do not worry, making this decision can be straightforward if you follow these steps:

• Calculate Your Exemptions: Determine what exemptions you are eligible for. For instance, if you live on rent, you can claim HRA, among other exemptions. These exemptions will become taxable in the new regime. You will get the Standard Deduction in both the old vs new regimes.
• Consider Deductions: In the old regime, deductions like those under Section 80C and home loan interest can significantly reduce your taxable income. In the new regime, no deductions are available.
• Combine Exemptions and Deductions: Subtract your exemptions and deductions from your salary to find your taxable income. This should guide your choice between the old and new tax regimes.
• Use an Income Tax Calculator: Alternatively, you can use an Income Tax Calculator to compare your tax payable under both regimes and make an informed decision.

Let us explore four scenarios to see how these factors impact your tax liability:

Scenario 1: No Investments and Deductions

If you lack any investments or deductions, you benefit from the new tax regime. The new tax slabs deliver reduced tax rates, enabling you to amass more savings in comparison to the old tax slabs. Calculate your tax liability under both the old vs. new tax regimes to ascertain which one suits you better.

Scenario 2: Investments and Deductions

If you possess investments and deductions, it is best to adhere to the old tax regime. The old tax rules permit you to claim exemptions and deductions like HRA, LTA, medical insurance, and more, effectively diminishing your taxable income. The new tax regime does not extend these deductions and exemptions, potentially leading to elevated tax payments upon switching.

Scenario 3: Higher Income Bracket

Should you find yourself within the higher income bracket (with an income exceeding Rs. 20 lakh), sticking with the old tax regime is advisable. The old tax rules impose a maximum tax rate of 30%, while the new tax regime introduces an additional tax slab of 35% for individuals earning above Rs. 20 lakhs.

Scenario 4: Lower Income Bracket

If you fall into the lower income bracket (earning less than Rs. 5 lakh), the new tax regime proves advantageous. The new tax slabs offer reduced tax rates, allowing for increased savings in comparison to the old tax slabs.

Tax on Long-Term Capital Gains (LTCG)

If you have invested in shares, mutual funds, or other assets yielding long-term capital gains, it is crucial to consider the tax implications. Under the old tax regime, LTCG incurs a 10% tax on gains exceeding Rs. 1 lakh, whereas the new tax regime imposes a flat 10% tax rate without any threshold. If your long-term investments yield substantial gains, it is prudent to adhere to the old tax regime.

Tax on Dividends

In the event of receiving dividends from share or mutual fund investments, it is imperative to factor in the tax implications. Under the old tax rules, dividends are subject to a 10% tax rate for individuals receiving over Rs. 5,000 in dividends annually. Conversely, the new tax rules tax dividends at a flat 10% rate without any threshold. If you receive a significant amount of dividends, it is advisable to retain the old tax regime.

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Income Tax FY 2023-24 FAQs

Q1. Do I need to adhere to the new income tax structure?

Ans: No, currently, if you are a salaried individual, you have the choice between the old vs. new regime structures. However, this choice does not apply to business owners filing returns for their businesses. To determine which tax structure is more advantageous for you, please refer to our examples.

Q2. How to calculate income tax?

Ans: To calculate the Income Tax, one must refer to an individual’s income, and follow the Income Tax Slab. These slab rates, which usually change with each budget, are also applicable depending on the individual’s age: Normal Citizens (up to 60 years old), Senior Citizens (60-80 years old), and Super Senior Citizens (above 80 years old).

Q3. What’s the definition of a rebate under section 87A in the IT Act?

Ans: Section 87A of the Income Tax Act of 1961, introduced in the Finance Act of 2013, grants tax rebates to individuals whose income is below Rs 5,00,000 while residing in India. Those with a taxable income of less than Rs 5 lakh can claim a full tax rebate. This rebate is exclusive to individuals and is calculated before applying the 4% health and education cess. 

Q4. How do you calculate Income Tax?

Ans: Income Tax Rates, based on the income slab, are applied after deducting all applicable deductions and exemptions. Certain deductions and exemptions may not apply in the new income tax structure, although this is not clear yet.

Q5. How does the government go about tax collection?

Ans: The Government collects taxes through three main methods: 

a. Voluntary payments made by taxpayers through designated Banks (e.g., Advance Tax and Self-Assessment Tax payments).

b. Taxes deducted at source (TDS).

c. Taxes collected at source (TCS). 

Q6. What do “income tax on companies” and “income tax other than companies” mean on the Challan?

Ans: The tax paid by companies on their income is referred to as corporate tax. The challan refers to it as “Income-tax on Companies (Corporation tax)-0020.” For non-corporate assessees, the term “Income-tax (other than Companies)-0021” is used for tax payments. 

Q7. Are the income tax slabs for AY 2023-24 the same for all taxpayers, regardless of age, in the new tax regime?

Ans: Yes, the new income tax slabs for AY 2023-24 (FY 2022-23) under the new tax regime do not vary based on the taxpayer’s age. Hence, the maximum tax-exempt income limit remains Rs 2.5 lakh, regardless of the individual taxpayer’s age. 

Q8.  When is the deadline for filing Income Tax Returns for AY 2023-24?

Ans: For most individuals, the deadline for filing income tax returns is July 31. 

Q9. Which tax regime is more suitable for incomes of 7 lakhs and 10 lakhs?

Ans: For an income of 7 lakhs, the new tax regime is beneficial. However, if your income is 10 lakhs, the old tax regime becomes advantageous only if you have made tax-saving investments (deductions other than standard deductions) exceeding Rs 2,62,500. If your deductions fall below Rs 2,62,500, then the new regime is a better choice.

Q10. How frequently can we transition between the old and new tax regimes?

Ans: You are allowed to make a switch in tax regimes just once during your lifetime. To do so, you must submit an application using the prescribed Form 10IE on or before the deadline for filing your income tax return as specified in Section 139 (1) of the Act.

Q11. What is the better tax regime for a 15 lakhs salary?

Ans: The choice between the old and new regimes depends on the amount of tax-saving investments you have made:

Old regime: if tax-saving investments exceed Rs. 3,58,000

New regime: if tax-saving investments are less than Rs 3,58,000

Q12. Which tax regime is more suitable for a 20 lakhs salary?

Ans: If your income is Rs 20 lakhs, the optimal tax regime depends on your eligibility for tax deductions:

Old regime: if tax-saving investments exceed Rs. 3,75,000

New regime: if tax-saving investments are less than Rs 3,75,000

Latest news on income tax old regime vs new regime:

Individuals with an annual income of up to Rs. 7.27 lakh will not have to pay income tax

Finance Minister Nirmala Sitharaman has announced that, under the new tax regime, individuals earning up to Rs 7.27 lakh per annum will be exempt from income tax. She emphasised the government’s commitment to providing tax benefits to the middle class and addressing concerns about those earning just above Rs 7 lakh. After thorough analysis, it turns out that individuals start paying tax only when their income exceeds Rs 7.27 lakh, with a break-even point at Rs 27,000.

The new tax regime has been adopted by around 5.5 crore taxpayers 

According to initial estimates from the revenue department, approximately 5.5 crore taxpayers have transitioned to the new tax regime introduced in this year’s budget for the current financial year. A senior government official reported that the majority of these taxpayers have a taxable income of up to Rs 7 lakh.