New Or Old? Choosing A Tax Regime

It is not about choosing between the old and new tax regimes based on how much money you save; it is about how you need to view income tax in the future

- Narayan Krishnamurthy

Income tax rarely finds a voice in public debate or discussions. Perhaps the only day, when income tax finds itself being discussed extensively, is on the day of the Union Budget when one anticipates announcements regarding changes in taxation. Earlier this year, during her Budget speech, Minister of Finance Nirmala Sitharaman announced changes in direct tax rates as well as rules which brought mixed reactions among the under seven crore individual income taxpayers. She also stated that the new tax regime would be the default option from April 1, 2023.

The new tax regime was introduced in the financial year 2020-21 for individual taxpayers and Hindu Undivided Families (HUF). However, it did not find that many takers and the fact that the old tax regime looked favourable despite the three slabs it offered compared to seven slabs under the new regime. A significant sweetener on offer this year in the new tax regime is the tax rebate on taxable income up to Rs 7 lakh and a standard deduction of Rs 50,000. So, anyone with a gross income of Rs 7.5 lakh would pay no tax.

In the old tax regime, gross total income up to Rs 7 lakh resulted in no tax if one claimed tax deductions up to Rs 1.5 lakh along with the standard deduction of Rs 50,000. With tax payers used to the format of the old tax regime and it being the default option, very few taxpayers opted for the new regime. The big difference between the old and new regimes is the choice of claiming deductions and exemptions in the old regime versus the lack of it in the new regime.