old vs new tax regime : When filing your ITR( Income Tax Return), you can choose between the two option Old Tax Regime and the New Tax Regime.
Old Regime → Have the Higher tax rates, but you can claim many deductions and exemptions under this (HRA, 80C, 80D, home loan interest, etc.).
New Regime → Have the Lower tax rates, but most deductions are not allowed (only standard deduction of ₹50,000 is allowed for salaried).
Old Vs New Tax Regime Explanation with Example
Let’s understand this in two cases:
Person A
- Has no Investments, and no Major Deductions from his side. And he has a Salary of ₹10,00,000.
- Where he claimed the Deductions for Only Standard Deduction of ₹50,000
- Under the Old Regime he will his Taxable Income will be 10,00,000 − 50,000 so his total will be ₹9,50,000
- After the deduction his Tax amount will be ₹1,02,500 a part from this Add 4% cess ₹4,100, so after adding cess the Final Tax amount will be ₹1,06,600
Under New Regime
The Taxable Income will be 10,00,000 − 50,000 = ₹9,50,000
and Tax (lower slab rates) will be ₹52,500
Add 4% cess = ₹2,100
Final Tax = ₹54,600
For Person A, New Regime is clearly better (almost 50% tax saved) because they don’t invest or claim deductions.
Person B
- He uses Deductions Smartly his Salary is ₹10,00,000 and the deductions he claimed
- Standard Deduction of ₹50,000 and he also has some investment under the Section 80C that he declared like
- 80C Investments (LIC, PPF, ELSS, etc.) = ₹1,50,000
- and also he declared a Medical Insurance under Section 80D of ₹25,000
- and a HRA Exemption = ₹75,000
- so his Total deductions will be ₹3,00,000
Under Old Regime
The taxable Income = 10,00,000 − 3,00,000 = ₹7,00,000
and the Tax = ₹52,500
on which Add 4% cess = ₹2,100
so the Final Tax = ₹54,600
Under New Regime
The taxable Income = 10,00,000 − 50,000 = ₹9,50,000
so the tax will be = ₹52,500
Add 4% cess on this = ₹2,100
So the final tax amount will be. ₹54,600
For Person B, both regimes are the same in this case. But if Person B had even more deductions (like home loan interest), the Old Regime would save more for him
Person A has no and deductions so for him the New Regime will be better.and,
Person B has many deductions but Both are equal here, and usually Old Regime give him more benefit when the deductions are higher.
I know,
If you don’t investment or have any claim deductions → Choose New Regime.
If you invest actively and have deductions →generally do comparison on both the regime , but usually Old Regime will saves you more.
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