Union Budget 2023–24: Why old tax regime is still better than new tax regime

With an aim to make the new tax regime lucrative, Finance Minister Nirmala Sitharaman has proposed several changes while keeping the old tax regime intact. However, back-of-the-envelope calculation shows that one can save more taxes under old regime if one avails existing tax exemptions and deductions.

For example, on salary of Rs 9 lakh, income tax works out to Rs 52,500 after availing standard deduction of Rs 50,000 and 80C deduction of Rs 1.5 lakh. If one calculates the income tax as per revised rates under the new tax regime the calculation works out to Rs 45,000.

However, if one avails more tax deductions available under the old regime such as 80D (Health Insurance up to Rs 25,000) and interest on home loan under Section 24B (Rs 2,00,000 deduction) and Rs 50,000 under NPS, then it works out to zero as income tax rebate is available for income up to Rs 5 lakh under old tax regime.

Similarly, on a salary of Rs 15 lakh, income tax works out to Rs 1,24,800 lakh under old tax regime after availing standard deduction, 80C, 80D and interest deduction u/s24B, etc. If one calculates income tax as per revised rates under the new tax regime the calculation works out to Rs 1.5 lakh while according to the previous rates it comes to Rs 1,87,500.

Clearly the old tax regime is still lucrative when it comes to tax calculation because of existing deductions and exemptions which are not provided under new tax regime.

Tax rebate limit has been increased to Rs 7 lakh under new tax regime. “Currently, those with income up to Rs 5 lakh do not pay any income tax in both old and new tax regimes. I propose to increase the rebate limit to Rs 7 lakh in the new tax regime. Thus, persons in the new tax regime, with income up to Rs 7 lakh will not have to pay any tax,” said the finance minister.

“This will provide major relief to all tax payers in the new regime. An individual with an annual income of Rs 9 lakh will be required to pay only Rs 45,000. This is only 5 per cent of his or her income. It is a reduction of 25 per cent on what he or she is required to pay now, ie, Rs 60,000. Similarly, an individual with an income of Rs 15 lakh would be required to pay only Rs 1.5 lakh or 10 per cent of his or her income, a reduction of 20 per cent from the existing liability of Rs 1,87,500,” Sitharaman said.

The comparison was made between old and revised tax rates under the new tax regime.