With the new tax regime offering lower rates but fewer deductions, many salaried taxpayers are wondering whether the old regime still makes sense. Here’s a comparison across income levels of ₹20 lakh, ₹25 lakh and ₹30 lakh.
Here look at two tax regimes and how they compare:
Old tax regime
₹2.5 lakh – Nil
₹2.5 lakh – to ₹5 lakh – 5% above ₹2.5 lakh
₹5 lakh – to ₹10 lakh – ₹12,500 + 20% above ₹5 lakh
₹10 lakh or above: ₹1,12,500 + 30% above ₹10,00,000
New tax regime:
Up to ₹4 lakh – Nil
₹4 lakh to ₹8 lakh – 5% above ₹4 lakh
₹8 lakh to ₹12 lakh – ₹20,000 + 10% above ₹8,00,000
₹12 to 16 lakh – ₹60,000 + 15% above ₹12,00,000
₹16 to ₹20 lakh – ₹1,20,000 + 20% above ₹16,00,000
₹20 to ₹24 lakh – ₹2,00,000 + 25% above ₹20,00,000
Above ₹24 lakh – ₹3,00,000 + 30% above ₹24,00,000
Deductions under both regimes:
The old tax regime offers a range of tax-saving benefits, including deductions of up to ₹1.5 lakh under Section 80C, HRA exemptions, and Section 80D benefits for health insurance premiums. The standard deduction available under this regime is ₹50,000.
Meanwhile, the standard deduction under the new tax regime is ₹75,000, which is much higher than the old regime. But it does not offer exemptions under Section 80C or Section 80D. However, taxpayers can still claim certain benefits, including employer contributions to the National Pension System (NPS) and interest on housing loans for let-out properties.
Accordingly, for taxpayers earning up to ₹12.75 lakh, the new regime is the obvious choice. However, the bigger question is – which one to pick for higher those who earns higher salaries – ₹15 lakh, ₹20 lakh, and ₹25 lakh.
Case 1: Tax liability on income of ₹20 lakh
Let’s assume, taxpayer A draws a salary of ₹20 lakh annually and qualifies for several exemption and deductions. She claims deductions through a ₹1.5 lakh investment under Section 80C, pays ₹30,000 towards health insurance premiums, and has a home loan on which she pays ₹3 lakh in annual interest.
Following this, her taxable income under the old regime is ₹16,25,000 after the exemption and deduction of ₹3,75,000. Accordingly, she is supposed to pay a tax of ₹3,12,000. Meanwhile, under the new tax regime, after the standard deduction of ₹75,000, her taxable income is ₹19,25,000 and the payable tax amount is ₹1,92,400.
Case 2: Tax liability on income of ₹25 lakh
Taxpayer B earns an annual salary of ₹25 lakh and has the same tax-saving investments and eligible deductions as Taxpayer A.
After claiming exemptions and deductions worth ₹3.75 lakh under the old tax regime, her taxable income comes down to ₹21.25 lakh. Based on this, her total tax liability works out to ₹4.68 lakh. Under the new tax regime, however, she can only claim the standard deduction of ₹75,000, resulting in a taxable income of ₹24.25 lakh. Even so, her tax outgo is lower at ₹3.19 lakh.
Case 3: Tax liability on income of ₹30 lakh
Taxpayer C earns an annual salary of ₹30 lakh and has the same tax-saving investments and eligible deductions as Taxpayer A. Apart from that she has an NPS contribution ₹75,000 lakh and a similar amount is deposited by her employer as well. She also made a donation of ₹2 lakh.
Under the old tax regime, deductions and exemptions totalling ₹5.5 lakh reduce her taxable income to ₹24.5 lakh, resulting in a tax liability of ₹5.69 lakh. In contrast, under the new tax regime, she is eligible only for the standard deduction of ₹1.5 lakh, which brings her taxable income to ₹28.5 lakh. Despite the higher taxable income, her tax bill is lower at ₹4.52 lakh due to the concessional tax rates available under the new regime.
In all three cases, new regime looks more reasonable than opting for the old tax regime.