OLD TAX VS. NEW TAX REGIME (Syllabus: GS Paper 3 – Economy)

Context: The default adoption of the new tax regime is a notable modification outlined in the Budget 2023.

Old tax Regime

• About: It is "deduction-based regime," offered a wide array of deductions and exemptions, offering potential benefits for taxpayers adept at leveraging them effectively.
• Extensive deductions and exemptions: With more than 70 options, including Section 80C offering a substantial limit of ₹1.5 lakh, these provisions have the potential to substantially decrease your taxable income and reduce your overall tax liability.
• Established system: It served as the primary tax regime for numerous years preceding the introduction of the new tax regime in 2020.
• Taxpayer discretion: Individuals retain the option to choose the old tax regime, even though the new regime is set as the default choice.

New Tax Regime

• About: The implementation of the new tax regime in India in 2020 marks a substantial shift, aiming to streamline processes through lower tax rates. However, this comes with the trade-off of reduced deductions and exemptions.
• Key Changes in FY 2023-24: Delving into the fiscal year 2023-24 (assessment year 2024-25), noteworthy adjustments have been introduced in the tax structure, reflecting the ongoing evolution of the system.
• Elevated basic exemption limit and rebate: The basic exemption limit, which represents the income threshold below which no tax is due, has been raised from ₹2.5 lakhs to ₹3 lakhs in the new tax regime. 

oAdditionally, the tax rebate under section 87A has been raised from ₹5 lakhs to ₹7 lakhs. Consequently, income up to ₹7 lakhs is now effectively tax-free in the new regime.

• Restoration of basic deduction: The standard deduction of ₹50,000, previously applicable exclusively to the old tax regime, has now been incorporated into the new tax regime. This serves to further decrease the taxable income under the new regime.
• Reduced surcharge: The surcharge rate on income surpassing ₹5 crores has been decreased from 37% to 25% in the new tax regime. This results in a reduced effective tax rate for individuals with high incomes who choose the new regime.