Overview of the new and old income tax regimes

The New Tax Regime was introduced during the Union Budget of 2020, offering lower slab rates and reduced tax rates for Individuals and HUFs. That’s how the Existing Tax Regime became the Old Tax Regime.

While the news of the reduced tax rates under the New Tax Regime was met with enthusiasm, it came with a catch. The new tax rates would only be applicable if no deductions were claimed from the total income, including Chapter VI A deductions or deductions for HRA and LTA from Salary Income.

The taxpayers have the flexibility to choose between the two regimes keeping in mind the benefits of the regime chosen. As a result, the majority of taxpayers found the Old Tax Regime to be more advantageous and showed little interest in the New Tax Regime.

Important changes introduced in Budget 2023 under New Tax Regime

The Finance Ministry recognized the shortcomings in the New Tax Regime. As a result, several significant changes were introduced in the Union Budget of 2023, with most of them relating to the New Tax Regime, which is as follows:

• The threshold for Section 87A increased from ₹5 lacs to ₹7 lacs.
• Salary Standard deduction is proposed at ₹ 50,000.
• The basic Exemption Threshold increased from ₹ 2.5 Lacs to ₹ 3 Lacs.
• The New Tax Regime has been made the default tax regime.
• The surcharge rate of 37% was reduced to 25% under the New Tax Regime.
• No changes were proposed in the Old Tax Regime.
• Marginal Relief for small taxpayers under the New Tax Regime.

How to choose between the New Tax Regime and Old Tax Regime

The first step towards deciding whether to opt for the New Tax Regime or the Old Tax Regime is to know the key difference between the two.

Tax Rates & Slabs of Old Tax Regime & New Tax Regime are applicable from 1st April 2023 onwards.

OLD TAX REGIME		NEW TAX REGIME
Up to Rs. 2.5 lakh	Nil	Up to Rs. 3 lakh	Nil
Rs. 2.5 lakhs to Rs. 5 lakhs	5%	Rs. 3 lakh to Rs. 6 lakh	5%
Rs. 5 lakhs to 10 lakhs	20%	Rs. 6 lakh to Rs. 9 lakh	10%
Income above 10 lakhs	30%	Rs. 9 lakh to Rs. 12 lakh	15%
		Rs. 12 lakh to Rs. 15 lakh	20%
		Income above Rs. 15 lakh	30%

The grass is greener on the other side. The same is with choosing between the two Tax Regimes. As you decide to go for a particular tax regime, the other one looks more lucrative.

The below chart presents what you get and what you lose in a particular Tax Regime:

	Old Tax Regime	New Tax Regime
Highest Tax Rate of 30%	Above 10 lacs	Above 15 lacs
Basic Exemption Limit	Starts from 2.5 lacs	Starts from 3 lacs
Threshold limit for rebate	5 lacs	7 lacs
Standard Deduction	50k	50k
Set off of brought forward business loss & unabsorbed depreciation	Allowed	Not allowed
Deductions under Chapter VI A	Allowed	Not allowed
Set off & Carry forward of House Property Loss	Allowed	Not allowed
Deduction for interest on self-occupied property	Allowed	Not allowed
HRA, Profession Tax, LTA exemption	Allowed	Not allowed
Marginal Relief to small taxpayers	Not allowed	Allowed
Employee’s own contribution to NPS	Allowed	Not allowed
Donations to Political Parties	Allowed	Not allowed

Old Tax Regime vs. New Tax Regime

• If you have c/f losses & unabsorbed depreciation, Old Regime is better
• If you have no investments under Chapter VI A, better to go for New Tax Regime
• The new Tax Regime is better if you don’t have extra deductions other than 80C
• Want to claim House Property Deductions? Go for Old Tax Regime
• Have income up to 7.5 lacs, enjoy zero tax with no investment obligations under New Tax Regime.

How New Tax Regime affects Self-employed Persons & Businessmen?

Following deductions and exemptions will not be allowed from business income under New Tax Regime

• Section 32 – Additional Depreciation
• Section 35AD – Deduction Capital Expenditure
• Section32AD – Investment Allowance
• Other deductions such as Section 33AB, Section 33ABA, Section 35, and Section 10AA are not allowed under New Tax Regime– Exemption for SEZ units
• Unabsorbed depreciation and business losses can be carried forward and set off in Old Tax Regime only

Importance of making an informed decision

The New Tax Regime is set to become the default tax regime from FY 2023-24 onwards. For salaried individuals, their TDS will be calculated based on the new provisions, making it important to evaluate which Tax Regime to adopt at the start of the FY.

For businesses, Advance Tax liability needs to be estimated at the beginning of the year. It is thus crucial to decide on the Tax Regime early to avoid penalties on non-payment of Advance tax and to ensure that you do not miss any opportunities to save taxes throughout the year.

Role of Tax Professionals and Advisors

There is a wealth of information available on various platforms about the suitability of each Tax Regime. However, since each case is unique, there cannot be a definitive answer as to which regime is best suited for a particular individual or business. It is always advisable to consult a tax professional who can assist in making the right selection.

At Master Brains, our team of experienced professionals can help you evaluate your tax situation, understand the pros and cons of each tax regime, and choose the one that best suits your needs. We offer a range of services that includes tax planning, return preparation, representation before tax authorities, drafting of replies for any show cause notices, succession planning, return review and much more. . Our consultants can also review your decision and help you change it while filing your ITR. Contact us today to schedule a consultation and maximize your tax savings.