Under the Income Tax Act, there are two main tax regimes available to taxpayers in India: the old tax regime and the new tax regime. While the choice between the two does not vary by sector, key differences influencing the decision are vital to understand. Each regime has its own tax rates, deductions and benefits that can significantly impact take-home pay. This overview help you determine which option might be the best fit for your financial situation.

Tax slabs

Old Tax Regime: Income up to ₹2,50,000 nil tax, income of ₹2,50,001 - ₹3,00,000 5% tax, income of 3,00,001 - ₹5,00,000 5% tax, income of ₹5,00,000 - ₹10,00,000 20% tax , income above ₹10,00,000 30% tax

New Tax Regime:

Tax Slab for FY2024-25 Income up to ₹3,00,000 nil tax, income of ₹3,00,001 - ₹7,00,000 5% tax, income of ₹7,00,001 - ₹10,00,000 10%, income of ₹10,00,001 - 12,00,000 15% tax, income of ₹12,00,001 - ₹15,00,000 20% tax, income above ₹15,00,000 30% tax

Deductions and exemptions:

Old Tax Regime Allows deductions (e.g., Section 80C, HRA, LTA) Standard deduction of ₹50,000 for salaried employees.

New Tax Regime

Fewer deductions are available; significant exemptions like HRA and LTA are not allowed. Standard deduction increased to ₹75,000 from ₹50,000 for salaried employees.

Rebate and Surcharge

The rebate under Section 87A has been raised in the new regime from ₹5 lakh to ₹7 lakh, enabling taxpayers with incomes up to this threshold to pay no tax. Surcharge rates reduced for high earners in the new regime, which lowers the effective tax rate for those earning above ₹5 crore.

Impact on take home pay

Salaried employees may benefit from the new tax regime if they do not utilise many deductions. For example an employee with a gross income of ₹9 lakh would pay approximately ₹85,800 under the old regime but only about ₹33,800 under the new regime due to lower rates and higher standard deduction.

High earners:

High-income individuals with substantial deductions may find the old regime more beneficial. For instance, an individual earning ₹50 lakh could face similar tax liabilities in both regimes if deductions exceed certain thresholds (for instance, over ₹3.75 lakh in deductions).

Low-income earners

They will generally benefit from the new regime due to higher tax-free limit and lower rates applicable up to ₹7 lakh. This could lead to increased disposable income and take-home pay without needing extensive documentation for deductions.

Conclusion

Choosing between old and new tax regimes largely depends on individual financial situation, including income level and eligibility for deductions. The new regime simplifies compliance and potentially raises take-home pay for many salaried individuals, while those with significant deductions may still find advantages in the old regime. Each taxpayer should evaluate their circumstances to determine which option maximises financial benefits.

(The writer is a tax expert at ClearTax)