Old Vs New Tax Regime – Which One Should You Choose?

The tax brackets for both the pre-2020 system and the post-2020 system were left unchanged by the Union Budget of 2022. Now, how can a citizen choose between the old and new tax systems? A thorough evaluation of the taxpayer’s tax burden and other considerations is necessary for settling on the most advantageous regime. Before settling on any tax regime, taxpayers should think about a few key factors.

There is uncertainty about which tax system is best for you because of the introduction of a new one. You are a taxpayer. So you may have trouble deciding which regime is a better option for your income situation.

An inquiry comes in this context: how do you make a living? Do you have a regular 9 to 5 job, do you manage your own business, or do you work in some other kind of profession? Many of you are probably attempting to figure out how much of a difference there is between the old tax and the new tax because of the changes in current sections.

There is no one-size-fits-all strategy for taxpayers. But this article will help you know which of the new and old tax regimes is more advantageous for your particular financial situation.

Advantages of the New Tax Regime

Expense reductions

Income beyond INR 15,000,000 is subject to the highest tax rate under the new regime’s seven tax brackets. This ranges from 0% to 30%. Incomes over INR 10 lakh were subject to the highest tax rate of 30 per cent under the old system. However, under the new system, there is just one tax bracket of 0 per cent.

The rates under the new tax regime are more lenient than those under the previous, old regime. As most exemptions are unavailable, there is less paperwork involved and filing taxes is easier.

An investor might not like being forced to invest in the required schemes for the full term

Every taxpayer will be given the same treatment under the new system. Most investments do have a lock-in time, before which they can’t be withdrawn. This can be useful for those taxpayer groups that do not have the defined modes of investment. Mutual funds, open-ended schemes, and deposits offer them attractive yields and withdrawal flexibility.

Liquidity Increase

The lower tax rate will result in greater money for the person, who is currently unable to invest in the schemes for various reasons.

Flexible investment options

Under the current tax system, investments can be made specifically for the investor as tax deductions. This can be done only if the taxpayer invests in the plans and the manner prescribed by the Act. So the taxpayer is restricted to making investments in just the approved programmes. The new method gives taxpayers more freedom to customise their investments to meet their individual needs.

The disadvantage of the New Tax Regime:

The new tax structure does not permit the taxpayer to make use of certainly available deductions.

Perks Of The Old Tax Regime

Over time, the old tax regime instilled a culture of savings in individuals. This was done by requiring them to make deposits in tax-saving schemes for making money for major life events like marriage, schooling, buying a home, medical expenses, and so on.

Disadvantages of the Old Tax Regime:

Investments qualify for tax breaks under the former regime, and a lock-in period of three to five years is fixed for most of these schemes. People who would rather have access to cash and invest in securities with a more fluid and open-ended tenure may find this tax strategy less than ideal.

The investor is limited to the defined schemes. These are generally low-risk and may not give big returns during the investing period, even though they may be doing well.

How to decide between the old and new tax structures?

There are two key distinctions between the old and current tax systems. First, it offers more progressive tax brackets at reduced rates. Secondly, if the new tax system is selected, taxpayers will not be able to make use of any of the main exemptions or deductions that are now available under the old tax regime. Therefore, if the savings from the lower rates exceed the value of the deductions under the former tax regime, a taxpayer may choose the new tax system.

The modification of the slab rates is the main difference between the previous and current tax systems. In India, taxpayers have to pay income tax according to the tax slab system into which they are classified. The tax slab is designed as per the average income of a person. Taxpayers with a higher income will be paying more taxes. There is a vital change in the previous and new tax regimes and the potential to reduce the tax. The old tax system allowed for many deductions. But the current system doesn’t.

The former tax system allowed taxpayers to use exemptions and deductions to lower their taxable income. The new system offers them none. By saving or spending on particular goods, taxpayers might qualify for a deduction that lowers their taxable income.

Which tax system is better?

After taking into account any available exemptions, a taxpayer can know which tax regime is preferable by calculating their income tax liability using the standard tax rates, i.e., the old tax slab rates. If a taxpayer does not wish to invest exclusively in qualified schemes but would like more options, they may want to investigate the new tax system. Before deciding whether to stick with the current system or switch to the new one, it’s wise to evaluate and analyze your situation under both options to discover which one better suits your needs.

The bottom line

If you get a salary, you have the option of making this selection every year, including when you file your tax returns. Things get more complicated for those who have business revenue; if you choose the new tax regime, you can only revert to the old system once. We hope you have got a brief idea about the old vs new tax regime. Visit Piramal for more such articles. Our experts have got answers to your every question.