Should I file taxes under the old or new tax regime?

Taxpayers followed the old tax regime until 2020. They can continue to calculate and file taxes under this regime in 2024. The old regime defined multiple tax brackets, offering lower taxes for senior citizens and super senior citizens. Additionally, it allowed several deductions and exemptions, empowering professionals to get tax breaks against donations, life insurance premiums, medical expenses, and health insurance premiums.

The crucial difference between the old tax regime vs the new tax regime is the availability of exemptions and deductions. Individuals choosing to pay under the old regime can enjoy the following exemptions and deductions:

Before calculating their taxable income, taxpayers can avail of a standard deduction of Rs. 50,000 on their annual income.

Taxpayers living in rented accommodation can claim HRA against their income.

Section 80C outlines specific investments and expenses that qualify for deductions up to Rs. 1,50,000 annually, including life insurance premiums, NPS contributions, PPF contributions, and children’s tuition fees.

Section 80D offers deductions against the amount paid for health insurance premiums and medical expenses. Taxpayers can claim deductions against the premiums paid for themselves, their spouses, dependent children and parents.

Taxpayers can claim deductions against the interest paid on home loans under Section 24.

Professionals repaying an education loan can claim a deduction against the interest amount under Section 80E.

Taxpayers travelling within India for vacations can claim deductions against the expenses incurred as long as they meet the prescribed guidelines.

In 2020, Finance Minister Nirmala Sitharaman introduced the new tax regime. The new regime offers lower tax rates and more tax brackets. However, it does not allow taxpayers to use any deductions or exemptions while calculating their taxable income. The Finance Ministry revised the new regime rules in 2023. The revisions allowed professionals to enjoy a standard deduction of Rs. 50,000 on their income, increased the tax rebate threshold from Rs. 5 lakhs to Rs. 7 lakhs, and modified the tax slabs. In 2023, the new tax regime became the default tax system. Taxpayers can evaluate the old vs new tax regime in 2023 and choose to file their taxes under either system.

We can evaluate the new vs old tax regime by understanding the different tax brackets.

Old tax regime

New tax regime

Taxpayers can calculate their taxes under the old tax regime vs the new one to decide the better option for their finances. Let’s explore this with an example.

Arjun, a 40-year-old professional, lives in Mumbai and earns Rs. 10,80,000 annually. He also earns interest of Rs. 5,000 annually from savings and deposits. Arjun pays Rs. 4,80,000 per year for his rental accommodation. He receives an HRA of Rs. 3,75,000 to offset his living expenses. He claims deductions of Rs. 1,50,000 under Section 80C and another of Rs. 32,000 under Section 80D. His employer deducts professional tax of Rs. 2,500 from his income each year, and Arjun makes donations eligible for Section 80G deductions worth Rs. 5,400. When calculated under the old regime, Arjun’s tax liability falls under the threshold of Rs. 5 lakhs, so he doesn’t have to pay any additional tax. Under the new regime, he would have to pay Rs. 68,000 in tax. For Arjuna, comparing the income tax old regime vs the new regime allows him to save up to Rs. 68,000 in taxes thanks to applicable deductions under the older system.

Now, let’s explore Maya’s tax calculation. She also earns Rs. 10,80,000 per year. However, she doesn’t receive any HRA. Like Arjun, she earns Rs. 5,000 from interest and pays life insurance premiums worth Rs. 2,48,000. She claims deductions of Rs. 1,50,000 under Section 80C and another of Rs. 32,000 under Section 80D. Maya’s employer deducts a portion of the professional tax from her income each month. She makes donations eligible for Section 80G deductions worth Rs. 5,400 per year. Based on the calculation, Maya has to pay Rs. 86,800 while claiming deductions and exemptions as opposed to Rs. 67,900 under the new regime. For Maya, comparing the income tax new regime vs the old regime offers tax savings of Rs. 18,900 under the new system.

As we can see from the examples, individuals must evaluate the income tax old regime vs the new regime to answer this question. Depending on your investments and expenses, the deductions could help cut your tax liability under the old regime. However, the lower tax brackets under the new regime may work in your favour.

Once you have a comprehensive understanding of the rules under the tax regime old vs new, you can decide on the best way to file your taxes for the year. Consider utilising online tax calculators for instant comparisons of your tax liability under each regime and decide based on what benefits you most. While planning your finances, consider purchasing investment plans and health insurance policies to safeguard your future, regardless of the tax breaks they offer.

Disclaimer

ARN: Zuno/Blog/Should I file taxes under the old or new tax regime/03/24/10.

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