Old tax regime vs new tax regime

“I come from two India” – one that opts for the old regime, and the other that opts for the new regime! Oh yes, she did it again! If the existing confusion around the new tax regime and old tax regime wasn’t enough, the Budget 2023 has further intensified it. Going by the current scale of discussion on this topic, this certainly seems to be the debate of the year, and from social media, it also seems to be the meme topic of the year. The old tax regime has many tax exemptions which are not available under the new regime. That’s what most of the news channels, articles, social posts and forwarded messages might have already told you. However, the part that most people don’t talk about is – it is beneficial only if you are claiming it. Take housing loans, for example, everyone won’t need to have them. Similarly, there are other items that you may or may not be investing in. Thus, the first conclusion is that no ‘one size fits for all’ here – each person needs to evaluate this decision according to their investment strategy.

Then, for salaried taxpayers, the option is available to change every year, so you can shift between regimes each year according to your new investments and choose whichever is beneficial to you. So salaried taxpayers, if you are reading this, just leave this tax calculation to your Chartered Accountants and remember only one thing – there’s no mandatory investment any more. You can invest in NPS and claim the tax benefit, or you can opt to not invest in NPS but instead invest in equity shares and still pay the same tax by opting for the new regime, and most probably earn higher returns on equity shares. The second conclusion here is that investments and taxation are no longer linked to each other – they are now two independent decisions. For people engaged in business, once you opt for the new regime, you have one chance to switch back from the new regime to the old regime. Thus, unlike salaried taxpayers, you have to make a consistent choice in your decision. However, keep in mind, one open secret – “the old tax regime is now very old, almost a senior citizen, and therefore, it might soon take complete retirement from all forms of taxes.”

How does the Government benefit from the new tax regime?

If you buy items online or through stores, chances are you have already experienced this marketing strategy. Companies often enter into new markets and new segments where the competition is already stiff. In such cases, it is difficult to sell its products against the established ones. Therefore, to gain the attention of the customers, they offer the product with attractive packaging at a deep discount. So, if you are not a brand-loyal person, which in a price-sensitive market like India is very common, most probably you will try the new product, or even consider replacing your existing one. Slowly, you grow habitual in using the product and meanwhile, the company increases the price, reduces the quantity, or brings a new pro version with a premium price for its popular features. The company loses some customers due to the changes, however, by then, it has already gained enough popularity, brand recognition and a customer base. This strategy has become common these days and there’s a good chance that the Government too is tapping into this same behavioural bias here.

Government is pretty clear with its agenda – reduce the number of exemptions and simplify the taxation laws. While it seems to be (since you are made to believe) in the interest of the taxpayers, the Government too has a lot to gain from the same. Currently, the Government is providing a lucrative option in the form of a new tax regime – it frees you from all those year-end dramas of collecting bills, rent receipts, investment proofs, etc. and is also allowing you to freely invest your money wherever you want to without worrying about taxes. This is good and progressive. For the corporates too, alternative schemes with lower tax rates are already available under which tax holidays are not available. However, on the flip side, if more and more taxpayers opt for a new simpler tax regime without deductions, the Government has multiple benefits. Bringing more people under the tax net has been the focus of all Governments to date.

  1. The Government may lure people into opting new tax regime. When enough people have already opted for a new regime, the Government will have a strong reason to shut down the old regime. Thereafter, it can simply increase the tax rates, tweak the slabs and increase the tax collection.
  2. Deductions add uncertainty. The Government cannot estimate its tax collections, because it doesn’t know if you are going to claim housing loan interest this year, or if a corporate is going to opt for a tax holiday. With the new tax regime, the government can estimate its tax collection better and in turn, budget its expenses in a planned manner.
  3. Better tax estimates also mean that the Government is in driving seat now. If it needs more money, it can simply tweak the tax rates and collect higher taxes. This happens more assuredly under the new regime.
  4. Collecting higher taxes with higher collection expenses is not fruitful. No tax deductions would mean no false claims, thus, fewer tax assessments. This saves a lot of time for tax officers who can focus on bigger issues and also improves the cost and efficiency of tax collection. Thus, the net tax collection i.e. tax collected less the expenses incurred to collect the tax, which is the real figure that matters to the Government can increase in long run.
  5. Deductions and exemptions are also the underlying cause of various tax litigations. It only brings disrepute to the tax department, increases its cost, and red tape for the taxpayers. Reducing the exemptions and deductions can significantly reduce litigations.
  6. When the tax slab limit is higher, people will also report their taxes on a higher side, thereby, bringing down the shadow economy a little. In later years, the Government can simply tax this income and people wouldn’t have the choice but to pay taxes. Besides, with the digitisation of the economy, it would be difficult to escape from taxation in later years.

Budget 2023 – Changes in tax rates

The changes in tax rates from FY 2024 onwards are as follows:

  1. The new tax regime is now the default tax regime for all taxpayers. If the taxpayer is desirous of opting for the old tax regime, they will have to specifically opt for it, while filing returns.
  2. The new tax regime is now extended to the Association of Persons (AOP), Body of Individuals (BOI) and Artificial Juridical Person (AJP), apart from Individuals and HUF.
  3. For individuals and HUF, there is no change in tax rates under the old regime.
  4. For individuals and HUF, the tax slabs have been improved under the new regime. There will be no tax on total income up to INR 3,00,000. Thereafter, the tax slabs increase by an additional INR 3,00,000 with tax rates being 5%, 10%, 15%, 20% and 30%. The tax slab of 25 per cent has been eliminated. Income above INR 15,00,000 continues to be charged at 30 per cent.
  5. Under the new regime, the threshold for rebates under section 87A has been increased. Now, no tax shall be payable if the total income is less than INR 7,00,000. Under the old regime, this threshold continues to remain at INR 5,00,000.
  6. Under the new regime, the highest rate of surcharge has been reduced to 25 per cent instead of 37 per cent earlier, for taxpayers with total income exceeding INR 5 crore.
  7. Under the new regime, salaried employees will now receive a standard deduction of INR 50,000, similar to the old tax regime.
  8. Co-operative societies engaged in manufacturing can now pay tax at a reduced rate of 15 per cent plus a 10 per cent surcharge and cess under new section 115BAE, if established on or after April 1, 2023, and production begins on or before March 31, 2024. Certain exemptions and incentives shall not be available under this option.
  9. As a result of changes in the new tax regime, taxpayers will need to re-evaluate their taxes under both schemes. What may be beneficial to one taxpayer will not necessarily be beneficial to others.