How to Choose Between Old and New Tax Regimes While Filing
- Nimisha Panda
- Oct 1
- 9 min read
Choosing the right tax regime while filing Income Tax Returns (ITR) in India can significantly impact your tax liability. The old tax regime allows multiple exemptions and deductions, whereas the new tax regime offers lower rates and simplicity but restricts most deductions. Understanding which regime benefits you requires evaluating income, investments, eligible deductions, and filing flexibility. TaxBuddy’s mobile app simplifies this process by comparing liabilities under both regimes and guiding taxpayers on optimal choices.
Table of Contents
Understanding Old and New Tax Regimes
The old tax regime follows a structure where taxpayers can claim deductions such as Section 80C (investments in PF, LIC, ELSS), 80D (medical insurance premiums), HRA exemptions, and other allowances. This regime is suitable for individuals who utilize multiple exemptions and deductions to reduce their taxable income.
The new tax regime, introduced in 2020, offers lower tax rates across slabs but significantly restricts exemptions and deductions. It is ideal for taxpayers who prefer simpler filing with fewer deductions and minimal documentation. Choosing the right regime requires a careful comparison based on income type, eligible deductions, and financial goals.
Key Differences Between Old and New Tax Regimes
Tax Slabs One of the most significant differences between the old and new tax regimes lies in the structure of tax slabs. The new tax regime offers lower tax rates across most income slabs, making it an attractive option for taxpayers who prefer to pay less tax without needing to claim multiple exemptions or deductions. However, this comes at the cost of limited exemptions. In contrast, the old tax regime has comparatively higher tax rates but allows taxpayers to claim a wide range of deductions and exemptions, which can significantly reduce taxable income. Choosing between these regimes depends on whether the taxpayer prioritizes lower nominal tax rates or the ability to reduce taxable income through deductions.
Deductions and Exemptions The old tax regime allows a variety of deductions under sections like 80C, 80D, and exemptions such as House Rent Allowance (HRA), standard deduction for salaried individuals, and certain allowances for education and medical expenses. These deductions and exemptions can substantially reduce the taxable income, especially for taxpayers who have made planned investments or incurred eligible expenses. On the other hand, the new tax regime eliminates most of these deductions and exemptions, retaining only a few, such as National Pension System (NPS) contributions. This makes tax computation simpler but may result in higher payable tax for those who are heavily invested in eligible savings instruments under the old regime.
Flexibility Flexibility is another key factor distinguishing the two regimes. The old regime is suitable for taxpayers who actively plan their investments and expenses to maximize tax benefits. For example, by investing in eligible instruments under Section 80C or claiming health insurance premiums under Section 80D, taxpayers can strategically lower their taxable income. The new regime, in contrast, is ideal for individuals who prioritize simplicity and want to avoid the administrative burden of maintaining proofs for various deductions. It provides a straightforward approach to tax calculation without the need for detailed documentation of exemptions.
Impact on Refunds The choice between the old and new tax regimes can also impact the amount of refund a taxpayer is eligible to receive. A carefully planned selection of deductions and exemptions under the old regime may reduce overall tax liability and increase the likelihood of receiving a larger refund if excess tax is deducted at source (TDS) or paid in advance. In the new regime, since deductions are limited, the refund depends mainly on the accuracy of TDS and advance tax payments, which may result in a smaller refund if taxes have been overpaid. Therefore, taxpayers should evaluate their income sources, investment patterns, and eligibility for deductions
How to Evaluate Your Tax Situation
Begin by analyzing total income sources: salary, business profits, capital gains, and other income. Next, list all possible deductions and exemptions under the old regime. Compare this with the tax liability under the new regime, which offers straightforward lower slabs. Consider factors like investment strategies, recurring expenses, and potential refunds. For salaried employees, HRA, professional tax, and standard deductions play a significant role, whereas business owners should evaluate audit compliance and depreciation benefits.
Calculating Tax Liability Under Both Regimes
Calculating tax liability under both the old and new tax regimes requires understanding the fundamental differences between them and the methodology used to compute taxable income. For taxpayers under the old regime, the process starts with identifying the total income, which includes salary, business or professional income, capital gains, house property income, and other sources. From this total income, all eligible deductions and exemptions are subtracted. These deductions can include popular sections such as 80C (investments in PPF, ELSS, life insurance premiums), 80D (medical insurance premiums), 80E (education loan interest), and exemptions like House Rent Allowance (HRA) or leave travel concessions (LTC). Once the taxable income is determined, the applicable slab rates for the financial year are applied to compute the income tax. Finally, applicable cess and surcharges, such as health and education cess at 4% of the tax liability, are added to arrive at the total tax payable.
Under the new tax regime, the calculation is more straightforward but restrictive in terms of deductions. Tax is computed on the total income without the majority of exemptions and deductions that are available under the old regime. This regime offers lower slab rates, allowing for potential tax savings if an individual has fewer eligible deductions. After applying the slab rates, the relevant cess and surcharges are added, just like in the old regime.
To help taxpayers decide which regime is more beneficial, a comparison using tables or online calculators can provide a clear picture of the total tax liability under each option. Platforms like TaxBuddy simplify this process by automatically computing tax liability under both regimes, factoring in all deductions, exemptions, and slab rates. This ensures an accurate comparison, helping taxpayers make informed decisions that optimize their tax savings and align with their financial planning.
Tax Regime Choice for Salaried Individuals vs Business Owners
Salaried Individuals: Typically benefit from the old regime if they have HRA, LTA, or significant 80C/80D investments. The new regime may suit those who prefer minimal paperwork and no dependency on exemptions.
Business Owners and Professionals: Old regime often offers tax planning flexibility through business deductions, depreciation, and audit-compliant benefits. New regime may simplify filing but could increase tax liability if deductions are substantial.
Role of Deductions and Exemptions in Regime Selection
Deductions and exemptions are the main drivers of tax savings under the old regime. Popular deductions include:
80C: PPF, ELSS, life insurance, principal repayment of home loan
80D: Health insurance premiums
HRA and LTA: Allowances for housing and travel
Standard Deduction: ₹75,000 for salaried individuals
The new regime removes most of these, so evaluating which deductions apply and their total value is essential before making a choice.
Employer Intimation and Bank Form Considerations
Salaried employees must inform employers of their chosen regime at the beginning of the financial year to ensure correct TDS calculation. Bank forms, loan interest declarations, and other investment proofs may need to be adjusted based on this choice. Filing under the wrong assumption can result in higher TDS or delayed refunds.
How TaxBuddy Simplifies Choosing the Right Regime
TaxBuddy provides an AI-driven interface that compares both regimes based on individual income, deductions, and exemptions. By entering key details like salary, business income, and eligible deductions, the platform calculates total tax liability for each regime. It also guides users on optimal filing, helping both salaried individuals and business owners make informed decisions efficiently and accurately.
Conclusion
Selecting the right tax regime can significantly impact your tax liability and refunds. By carefully comparing the old and new tax regimes, evaluating deductions and exemptions, and using platforms like TaxBuddy, taxpayers can ensure accurate filing, minimize liabilities, and maximize savings. For anyone looking for assistance in tax filing, it is highly recommended to download theTaxBuddy mobile app for a simplified, secure, and hassle-free experience.
FAQs
Q1. How do I choose between the old and new tax regimes? Choosing between the old and new tax regimes depends on your total income, eligible deductions, and exemptions. The old regime allows deductions like Section 80C (investments in PF, LIC, ELSS), HRA, and LTA, which can reduce your taxable income significantly. The new regime, while offering lower tax rates for most slabs, removes most deductions. To decide, compare your tax liability under both regimes using online calculators or AI-driven platforms like TaxBuddy. It helps you understand which option minimizes your tax outflow based on your individual financial situation.
Q2. Can salaried employees switch regimes every year? Yes, salaried individuals can opt for either the old or new tax regime in each financial year. This flexibility allows employees to choose the regime that best suits their current financial circumstances, especially if their income, deductions, or exemptions change. For example, if you invest heavily in tax-saving instruments, the old regime may be advantageous; otherwise, the new regime with lower tax rates might be better.
Q3. Which regime is better for business owners? For business owners, the old regime often provides more tax planning flexibility. It allows deductions on business expenses, depreciation of assets, Section 80C investments, and other exemptions, reducing taxable income. The new regime removes many of these deductions, limiting planning options. However, if your business has minimal deductions, the lower slab rates under the new regime could still be attractive.
Q4. Are HRA and LTA available in the new regime? No, under the new tax regime, most exemptions such as House Rent Allowance (HRA) and Leave Travel Allowance (LTA) are not available. Taxpayers under the new regime pay tax on their entire salary, including allowances, though the lower slab rates partially offset this. In contrast, the old regime allows you to claim HRA and LTA to reduce taxable income, especially beneficial for salaried individuals living in rented accommodations or frequently traveling.
Q5. How does TaxBuddy help in regime selection? TaxBuddy simplifies regime selection using AI-driven tax calculations. By entering income, deductions, and exemptions, the platform compares tax liabilities under the old and new regimes. It provides a clear recommendation on which regime saves the most tax. This feature is particularly helpful for individuals with multiple income sources, such as salary, freelance income, or capital gains, ensuring the choice aligns with your financial situation.
Q6. Does choosing the new regime affect TDS from the employer? Yes, the employer calculates Tax Deducted at Source (TDS) based on the chosen tax regime. Selecting the wrong regime may result in either excess or insufficient TDS, leading to potential refunds or tax dues. If you opt for the new regime, update your employer promptly to ensure TDS aligns with your tax liability. Platforms like TaxBuddy can help verify TDS calculations before filing to avoid surprises at year-end.
Q7. Can I claim Section 80C deductions in the new regime? No, most Section 80C deductions, including PF contributions, life insurance premiums, ELSS investments, and tuition fees, are not available under the new regime. This is one of the key differences between the two regimes. The old regime allows these deductions, which can significantly reduce taxable income, especially for salaried employees and business owners investing in tax-saving instruments.
Q8. How often should I review my tax regime choice? It is recommended to review your tax regime annually. Changes in income, investments, or eligibility for deductions can affect which regime is more beneficial. For instance, if you make substantial tax-saving investments in a year, the old regime may be better. Conversely, if you earn mostly salary without deductions, the new regime might save more tax. Regular review ensures your regime choice minimizes tax liability effectively.
Q9. Do business owners need to inform anyone about their chosen regime? Yes, accurate bookkeeping and financial reporting must reflect the chosen tax regime. Business owners and professionals must ensure that accounting records, audit reports, and ITR filings align with the selected regime for compliance purposes. Incorrect reporting could trigger notices or penalties. Platforms like TaxBuddy guide business owners through accurate regime selection and filing, reducing compliance risks.
Q10. Does TaxBuddy provide both self-filing and expert-assisted plans? Yes, TaxBuddy offers both self-filing and expert-assisted options. Self-filing allows you to file ITR directly through the platform using automated guidance, AI-driven calculations, and pre-filled forms. Expert-assisted filing connects you with tax professionals who review your data, suggest optimizations, and file the return on your behalf. This dual approach ensures flexibility, accuracy, and convenience.
Q11. Can changing regimes impact my refund? Yes, the chosen tax regime affects your taxable income and final tax liability. A switch between regimes can result in higher or lower TDS, altering the refund amount. For example, choosing the new regime without deductions may lead to higher TDS, which could increase your refund when the return is filed. TaxBuddy helps simulate scenarios under both regimes to predict refund amounts and optimize tax planning.
Q12. Is the new regime suitable for first-time taxpayers? Yes, the new tax regime can be simpler for first-time taxpayers. With fewer exemptions and deductions to manage, the process becomes more straightforward, reducing documentation requirements and potential filing errors. Salaried individuals or young professionals with basic income sources often find the new regime easier to understand and calculate. TaxBuddy further simplifies the process using AI-driven filing guidance and step-by-step assistance.
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