Difference Between Old and New ITR Regime in India

The Indian government announced a new income tax system in 2020, giving taxpayers a choice between the old and new regimes. While the new regime offers lower tax rates but fewer tax deductions and exemptions, the old system adheres to a tax structure that has existed for many years.

Old ITR Regime

The old income tax regime follows a tax structure that has existed for many years. Under this regime, taxpayers can avail of various tax deductions and exemptions, which help to reduce their taxable income and, consequently, their tax liability. The following are some of the critical features of the old income tax regime:

Tax Rates: The old income tax regime has seven tax slabs with varying tax rates, depending on the taxable income. For taxpayers with taxable income beyond Rs. 10 lacs, the maximum tax rate is 30%.
Tax Deductions and Exemptions: The previous income tax scheme allowed taxpayers to claim numerous tax deductions and exemptions under several parts of the Income Tax Act, including Sections 80C, 80D, and 24. These deductions and exemptions help to reduce the taxable income and, consequently, the tax liability.
Rebates: The old income tax regime provides taxpayers with a rebate of up to Rs.12,500/- if their taxable income is up to Rs.5 lacs. This rebate is available under Section 87A of the Income Tax Act.

New ITR Regime

The new income tax regime, introduced in 2020, offers lower tax rates than the old regime but fewer tax deductions and exemptions. The following are some of the critical features of the new income tax regime:

Tax Rates: The new income tax regime has four tax slabs with lower tax rates than the old regime. The maximum tax rate is 30%, which applies to people with taxable income over Rs.15 lacs.
Tax Deductions and Exemptions: The new income tax regime offers fewer tax deductions and exemptions than the old regime. Taxpayers cannot claim deductions under Section 80C, which allows deductions for investments in PPF, EPF, life insurance, etc. However, the new regime allows a standard deduction of Rs. 50,000 and will enable deductions for contributions to the National Pension System (NPS) and health insurance premiums under Section 80D.
Rebates: The new income tax regime does not offer any rebates.

Differences between the Old and New ITR Regimes

The primary distinctions between the old and new income tax systems are as follows:

Tax Rates: The new income tax regime offers lower tax rates than the old regime. Taxpayers with a taxable income of up to Rs.5 lacs can avail of lower tax rates under both regimes. However, the new regime offers lower tax rates for taxpayers with a taxable income of more than Rs.5 lacs. For example, under the old regime, taxpayers with a taxable income of Rs.10 lacs would be subject to a tax rate of 30%. Under the new regime, the exact taxpayer would be subject to a tax rate of 20%.
Tax Deductions and Exemptions: The old regime allows taxpayers to claim various tax deductions and exemptions, which help to reduce the taxable income and, consequently, the tax liability. However, the new regime offers fewer tax deductions and exemptions. Taxpayers cannot claim deductions under Section 80C, which allows deductions for investments in PPF, EPF, life insurance, etc. However, the new regime allows a standard deduction of Rs.50,000/-, which was not available in the old regime. Additionally, deductions for contributions to the National Pension System (NPS) and health insurance premiums under Section 80D are allowed under the new regime.
Rebates: The old regime provides taxpayers with a rebate of up to Rs.12,500/- if their taxable income is up to Rs.5 lacs. This rebate is available under Section 87A of the Income Tax Act. However, the new regime does not offer any rebates.

Example:

Let us consider an example of a taxpayer with a taxable income of Rs.8 lacs.

Under the old regime, the tax liability would be calculated as follows:

Taxable Income = Rs.8,00,000

Less: Deductions under Section 80C = Rs.1,50,000

Less: Deductions under Section 80D = Rs.25,000

Total Taxable Income = Rs.6,25,000

Tax = Rs.12,500 + 20% of (Rs.6,25,000 – Rs.5,00,000) = Rs.12,500 + Rs.25,000 = Rs.37,500

Under the new regime, the tax liability would be calculated as follows:

Taxable Income = Rs.8,00,000

Less: Standard Deduction = Rs.50,000

Total Taxable Income = Rs.7,50,000

Tax = 10% of (Rs.7,50,000 – Rs.5,00,000) + 20% of (Rs.8,00,000 – Rs.7,50,000) = Rs.25,000

The above example shows that the tax liability under the new regime is lower than the tax liability under the old regime. However, the taxpayer cannot claim deductions under Section 80C, which allows deductions for investments in PPF, EPF, life insurance, etc. Additionally, the rebate of Rs.12,500/- available under the old regime is not available under the new regime.

Taxpayers can select between the old and new income tax regimes. They can choose the one that is more beneficial to them based on their income, deductions, and exemptions. If they decide on the new regime, they cannot claim certain deductions and exemptions available in the old regime. However, they can opt for the new regime in one financial year and revert to the old regime in the next financial year.

In conclusion, the new income tax regime offers lower tax rates but fewer tax deductions and exemptions than the old regime. Taxpayers can opt between the old and new regimes based on their income, deductions, and exemptions. While the new regime may benefit taxpayers with lower deductions, it may not be helpful for taxpayers with higher deductions. Therefore, taxpayers should carefully consider the benefits of both regimes before choosing the one that is more beneficial to them.