New vs Old Tax Regime: Difference and Comparison

Key Takeaways

1. The new tax regime in India, introduced in the Union Budget 2020, aims to simplify the existing income tax structure.
2. The old tax regime in India is the traditional taxation system, where taxpayers can claim deductions to reduce their taxable income.
3. The new regime simplifies tax planning, primarily based on fixed-rate income slabs. In contrast, in the old regime, taxpaying can be complex as taxpayers need to strategize to maximize deductions.

What is New Tax Regime?

The new tax regime in India, introduced in the Union Budget 2020, aims to simplify the existing income tax structure and allow taxpayers to choose between the old and new regimes. This regime offers reduced tax rates but eliminates most of the deductions and exemptions available in the old regime.

Under the new regime, taxpayers can pay taxes at lower rates, particularly for individuals with an income of up to Rs 15 lakh. However, to avail of these low tax rates, individuals cannot claim deductions such as the standard deduction, house rent allowance, and various exemptions for interest on housing loans.

What is Old Tax Regime?

The old tax regime in India is the traditional taxation system, where taxpayers can claim deductions and exemptions to reduce their taxable income. This regime allows for various deductions, including housing loans, education expenses, medical insurance, etc. It has been the cornerstone of the country’s taxation system for several years.

The tax slabs under the old regime are similar to the new regime. However, the tax liability can vary significantly based on the deductions claimed by the taxpayer. Taxpayers can choose the old regime if they have substantial deductions that significantly reduce their tax liability, making it more advantageous.

The old tax regime allows for personalized tax planning.

Difference Between New and Old Tax Regime

1. The new tax regime offers lower tax rates. Still, it eliminates most deductions and exemptions, resulting in a simplified tax structure. In contrast, the old tax regime has more tax slabs with varying rates, including deductions and exemptions.
2. The new regime simplifies tax planning, primarily based on fixed-rate income slabs. In contrast, in the old regime, taxpaying can be complex as taxpayers need to strategize to maximize deductions.
3. The new regime needs to be more flexible due to the limited deduction and a standardized approach to tax calculation. In contrast, the old regime allows taxpayers to choose deductions that best suit their financial goals.
4. The new regime does away with most deductions and exemptions, aiming for a more straightforward tax calculation. In contrast, under the old regime, the new regime can claim deductions and exemptions for various expenses, investments, and savings.
5. The new regime reduces the compliance burden, making it easier to file taxes, while taxpayers in the old regime may face a higher burden due to the need to track and claim various deductions.

Comparison Between New and Old Tax Regime

Parameters	New Tax Regime	Old Tax Regime
Tax Rates	Offers low tax rates resulting in a simplified tax structure	A higher number of tax slabs with varying rates
Tax planning complexity	Simplifies tax planning	Complex as taxpayers need to strategize to maximize deductions
Flexibility	Less flexible due to limited deduction and standardized approach to tax calculation	Offers flexibility for taxpayers to choose deductions that best suit their financial goals
Deduction and Exemption	It does away with most deductions and expenses	Claim deduction and exemption for various expenses, investments, and savings
Compliance burden	Reduces compliance burden, making it easier to file taxes	Higher compliance burden due to the need to track and claim various deduction

References

1. https://www.jstor.org/stable/40981384
2. https://academicjournals.org/journal/JAT/article-full-text-pdf/85E3697763