Introduction to India's Dual Tax Regime

Since the Union Budget 2020, Indian taxpayers have had the option to choose between two income tax regimes: the traditional regime with higher tax rates but numerous deductions and exemptions, and the new regime with lower tax rates but fewer deductions. The 2023 and 2024 budgets have further modified the new regime, making it more attractive for many taxpayers.

Overview of Both Tax Regimes for FY 2024-25

New Tax Regime (Default from FY 2023-24)

The new tax regime offers the following tax slabs:

• Income up to ₹3 lakh: Nil
• ₹3 lakh to ₹6 lakh: 5%
• ₹6 lakh to ₹9 lakh: 10%
• ₹9 lakh to ₹12 lakh: 15%
• ₹12 lakh to ₹15 lakh: 20%
• Above ₹15 lakh: 30%

Key features:

• Standard deduction of ₹50,000 is available
• Family pension deduction is available
• Rebate under Section 87A increased to ₹25,000 for income up to ₹7 lakh
• Most other deductions and exemptions are not available

Old Tax Regime

The old tax regime has the following tax slabs:

• Income up to ₹2.5 lakh: Nil
• ₹2.5 lakh to ₹5 lakh: 5%
• ₹5 lakh to ₹10 lakh: 20%
• Above ₹10 lakh: 30%

Key features:

• More than 70 deductions and exemptions available
• Major deductions include Section 80C (up to ₹1.5 lakh), Section 80D (health insurance), HRA, LTA, home loan interest, etc.
• Standard deduction of ₹50,000 for salaried employees
• Rebate under Section 87A up to ₹12,500 for income up to ₹5 lakh

Comparing Tax Liability: Case Studies

Case 1: Annual Income of ₹8 Lakh with Minimal Deductions

Old Regime: Tax liability of approximately ₹75,400

New Regime: Tax liability of approximately ₹46,800

Verdict: New regime is better by ₹28,600

Case 2: Annual Income of ₹12 Lakh with Maximum Deductions

Old Regime: Tax liability of approximately ₹1,17,000 (after deductions of ₹3.5 lakh)

New Regime: Tax liability of approximately ₹1,17,000

Verdict: Both regimes yield similar results

Case 3: Annual Income of ₹20 Lakh with Home Loan and Investments

Old Regime: Tax liability of approximately ₹3,12,000 (after deductions of ₹4.5 lakh)

New Regime: Tax liability of approximately ₹3,64,000

Verdict: Old regime is better by ₹52,000

Factors to Consider When Choosing a Tax Regime

Choose the New Regime if:

• Your income is below ₹7 lakh (completely tax-free under new regime)
• You don't claim many deductions (less than ₹1.5-2 lakh in total)
• You prefer simplicity in tax filing
• You're early in your career with fewer investments and no home loan

Choose the Old Regime if:

• You have a home loan (interest deduction up to ₹2 lakh)
• You have significant investments eligible for Section 80C
• You pay rent without receiving HRA or your HRA is less than the actual rent
• You or your family have significant medical expenses or insurance premiums
• Your total deductions exceed ₹2.5-3 lakh

How to Switch Between Regimes

Salaried individuals can switch between regimes each financial year by informing their employer at the beginning of the year or while filing their income tax return. Individuals with business income can switch from old to new regime only once, and back to the old regime only once.

Conclusion

There's no one-size-fits-all answer to which tax regime is better. The optimal choice depends on your income level, investment patterns, and eligible deductions. Use our tax calculator to compare both regimes based on your specific financial situation and make an informed decision.