You are at your office desk, looking at your payslip, and wondering why your net salary is lower than you thought. Taxes. They are unavoidable, still, do you know that you have a choice regarding their mode of execution? The Government of India has introduced a new income tax rule and since 2020 this rule has been an alternative for taxpayers to the old one. The question is, which one to pick? So, Let’s check the details.

Taxes make up a significant part of your financial life, and knowledge of the way they work can keep more money for you. The previous tax regime has been a part of the system for years, naming some deductions and privileges. However, the new tax regime is more straightforward, but it imposes many of the aforementioned deductions and tax exemptions. The decision to go for one of the methods can be very confusing, though armed with the necessary know-how, one can make a well-weighed choice.

Understanding the Old Tax Regime

The old tax regime has been the universal standard for a long time now. It provides several deductions and exemptions so that your taxable income can be cut down considerably thus, it operates in the following manner:

• Income Tax Slabs: The old tax regime has different tax gross which is the combination of just taxable income. For instance, the income before the amount of ₹2.5,000 is free of taxes, while the amount between ₹2.5 lakh and ₹5 lakh is subject to 5% taxation.
• Deductions: You can claim deductions under the following sections 80C, 80D, and HRA. Section 80C entitles one to claim deductions for investments in PPF, ELSS, and life insurance premiums.
• Exemptions: Other benefits like Leave Travel Allowance (LTA), education allowance, etc. can also plug the gap in your taxable income.

Two years ago, my friend Ravi provided me with a very good example. He went in claiming HRA and investing in PPF under the old tax regime to save a lot of money. Thus he managed to make the deductions accordingly and thus the very next thing happened, his taxable income was significantly reduced, as a consequence of which he paid less taxes.

Understanding the New Tax Regime

The new tax regime was launched in 2020 for the inconvenience of filing a tax return which is most of us. It allows tax rates to be reduced but contains the elimination of deductions as well as exemptions. The following are the key points to keep in mind:

• Lower Tax Rates: In the new tax regime, tax rates have been reduced compared to the old basis. For example: An income range of ₹5 lahks to ₹7.5 lakhs was taxed at 10% under the new regime while under the old regime, it was taxed at 20%.
• Simplified Filing: The new tax regime has fewer remaining deductions and exemptions Board which applied the tax filing process does thus unlike pre-2019 the tax filing will be simple and fast. 
• Optional: In every assessment year you have the freedom to switch between both tax regimes where you can choose the one that benefits you more.

Example: If your taxable income is ₹10 lakh then the new tax regime could save you money except for those deductions being many. Conversely, if you have substantial investments and expenses which are eligible for deductions it is advisable to proceed with the old regime.

Why Two Regimes Exist

The government initiated the new tax system in Budget 2020 as a substitute for the existing system. The aim was to make taxes easy and cheaper but with fewer deductions and exemptions available. Nevertheless, the old system would remain in operation since it still favours many taxpayers who reference deductions to decrease their taxable income.

Key Reasons for Two Regimes:

• Simple Tax Treatment: The new regime makes tax planning easier through low rates and a few clauses at this point.
• Flexibility of planning: Especially those people who mostly use deductions to lower their income taxes have nothing but the old system as an option.
• Incentivize Compliance: The availability of choices ensures that taxpayers choose the system that best suits their situation.

How Income Tax Slabs Affect Your Take-Home Pay

Financial circumstances justify all Indian tax collection regimes. Both Old and New are available as options.

New Tax Regime (FY 2024-25)

Income Range (₹)	Tax Rate
Up to ₹3,00,000	Nil
₹3,00,001 – ₹7,00,000	5% on income exceeding ₹3,00,000
₹7,00,001 – ₹10,00,000	₹20,000 + 10% on income exceeding ₹7,00,000
₹10,00,001 – ₹12,00,000	₹50,000 + 15% on income exceeding ₹10,00,000
₹12,00,001 – ₹15,00,000	₹80,000 + 20% on income exceeding ₹12,00,000
Above ₹15,00,000	₹1,40,000 + 30% on income exceeding ₹15,00,000

Old Tax Regime (FY 2023-24)

Income Range (₹)	Tax Rate
Up to ₹2,50,000	Nil
₹2,50,001 – ₹5,00,000	5% on income exceeding ₹2,50,000
₹5,00,001 – ₹10,00,000	₹12,500 + 20% on income exceeding ₹5,00,000
Above ₹10,00,000	₹1,12,500 + 30% on income exceeding ₹10,00,000

For great results: Think of using Automated trading accounts like Zerodha and Upstox to see your Investments and plan tax savings. 

Key Differences Between Old and New Tax Regimes

The comparison of the two regimes side by side is on the agenda:

Feature	Old Tax Regime	New Tax Regime
Tax Rates	Higher rates but with deductions	Lower rates but no deductions (except standard deduction).
Deductions/Exemptions	Allows deductions (e.g., 80C, HRA, LTA).	Very few deductions (e.g., standard deduction of ₹50,000).
Flexibility	More complex but beneficial for high deductions.	Simpler but may not benefit those with high deductions.
Ideal For	Individuals with high investments and expenses.	Individuals with minimal investments and expenses.

Key Takeaway: The new tax regime is easier for the handiness and the financial situation is more straightforward but the old tax regime still benefits those with major deductions and exemptions.

How to Choose the Right Regime

The alternative between both regimes comes out of your financial state. Here’s how you can choose:

1. Choose the Old Regime If:

• You have a good portion of your investments in tax-saving instruments (for example, PPF, ELSS, or NPS).
• You are claiming deductions for HRA, LTA, or medical insurance (Section 80D).
• Your total deductions are more than ₹2-3 lakhs a year.

2. Choose the New Regime If:

• You don’t have many investments or expenses to claim deductions.
• You prefer a less complex tax system with lower tax rates.
• Your total deductions are quite insignificant (e.g., less than ₹1-2 lakhs).

Example: Which Regime is Better?

Case 1: High Deductions (Old Regime is Better)

• Income: ₹12,00,000
• Deductions (80C, HRA, 80D): ₹3,00,000
• Taxable Income (Old Regime): ₹12,00,000 – ₹3,00,000 = ₹9,00,000
• Tax (Old Regime): ₹1,12,500
• Tax (New Regime): ₹1,15,000
• Verdict: Utilizing the Old regime will save ₹2,500.

Case 2: Minimal Deductions (New Regime is Better)

• Income: ₹10,00,000
• Deductions: ₹50,000 (only standard deduction)
• Taxable Income (New Regime): ₹10,00,000 – ₹50,000 = ₹9,50,000
• Tax (New Regime): ₹92,500
• Tax (Old Regime): ₹1,12,500
• Verdict: The New regime will save ₹20,000 if the taxpayer chooses this tax regime

How to Switch Between Regimes

• Salaried Individuals: The first step to changing your plans is letting your company know. You can unveil your desired regime at the beginning of the fiscal year by making a declaration. Your employer will ship it to the government. 
• Others: You can choose whether you want the tax regimes for the assessment year during the time of your tax return filling.

Why Both Regimes Coexist

The government seeks to:

• Simplify Taxes: The new tax regime is not only simpler to understand but can be used by people with little familiarity.
• Provide both options: The old regime is optimal for those who depend on deductions while the new system serves the rest well.
• Encourage Voluntary Compliance: By offering options, the government strategizes that taxpayers can use the system that fits them best.

Tax Rebates and Deductions: Old vs. New

Tax rebates and deductions can have a far-reaching influence on your taxable income. The following are the major distinctions:

• Old Regime: The one who brings a few deductions and rebates in addition to the one who brings this section 80C limit under-investment PPF, ELSS, and life insurance premiums can claim a full amount of up to ₹1.5 lahks.
• New Regime: In the new regime, you will be allowed fewer deductions but not higher rates. For example: in the new regime, you do not have 80C deductions but you may have total tax savings while you will have few deductions due to lower tax rates.

Example: You can claim max. ₹1.5 lakh in the old regime section if the sections are comical. The new regime does not do this but the law might help you better than the big deductions of the past. New rates are lower.

Tax Calculation and Rebate under Section 87A (New Regime)

Income  (₹)	Tax Calculation	Tax Amount  (₹)	Rebate Under section 87A (₹)	Net Tax Payable (₹)
3,00,000	Nil	0	0	0
4,00,000	5% of (₹4,00,000 – 3,00,000) = ₹5,000	5,000	5,000	0
5,00,000	5% of (₹5,00,000 – 3,00,000) = ₹10,000	10,000	10,000	0
6,00,000	5% of (₹6,00,000 – 3,00,000) = ₹15,000	15,000	15,000	0
7,00,000	5% of (₹7,00,000 – 3,00,000) = ₹20,000	20,000	20,000	0
8,00,000	₹20,000 + 10% of (₹8,00,000 – 7,00,000) = ₹30,000	30,000	25,000	5000
9,00,000	₹20,000 + 10% of (₹9,00,000 – 7,00,000) = ₹40,000	40,000	25,000	15,000
10,00,000	₹20,000 + 10% of (₹10,00,000 – 3,00,000) = ₹50,000	50,000	25,000	25,000
12,00,000	₹50,000 + 15% of (₹12,00,000 – 10,00,000) = ₹80,000	80,000	25,000	55,000
15,00,000	₹80,000 + 20% of (₹15,00,000 – 12,00,000) = ₹1,40,000	1,40,000	25,000	15,000

Salary and Tax Calculator: Your Best Friend

The use of a salary income tax calculator can lead to an informed decision. The following are the reasons why:

• Precision: It gives accurate tax calculations depending on your income and deductions.
• Comparison: You may take both regimes and put side-by-side them on the comparison sheet to see which one is more favourable for you.
• Convenience: It transforms the complex tax brackets and severance thus enabling you to detect your tax risk easily.

Platforms that can be accessed: Some platforms, such as Zerodha, Upstox, Paytm Money, and Alice Blue are the best tax calculators that can be used confidently. They are very user-friendly and can lead you to the right decision.

Conclusion: Making the Right Choice

Choosing between the older or new tax regimes isn’t that simple. Look at your income, your investments, and what your aims are after the future. Take advantage of a salary and tax calculator to get an educated answer. Bear in mind that the right decision could lead to savings in the thousands.

Taxes are not the only things that lessen your take-home pay. They also affect your investments. You can check out our article on Hidden Ways Taxes Affect Your Income and Investments for deeper insights. This article outlines the impact that taxes have on the most vital financial health aspect of your life, namely, savings, investments, and economic stability.

FAQs

Can I switch between tax regimes every year?

The answer is yes you can migrate from the old tax regime and the new tax regime every financial year.

Which regime is more beneficial for high-income earners?

Your deductions determine which regime is more suitable for you. The old regime may work better for high-income earners who have considerable deductions.

Are there any tax rebates in the new tax regime?

Yes, the new regime provides a tax rebate under section 87A to the people whose incomes are in a certain range, for instance, those that are equal to or less than ₹7 lakh.

Can I use a salary income tax calculator for both regimes?

Yes, most of the calculators they offer allow you simultaneously to see what both regimes will cost you.

What happens if I don’t choose a regime?

If there is no active selection, the new tax system will be used automatically.