Updated: May 31
The new income tax regime is also set to become the default regime from the FY2023-24. When paying taxes under the new regime, one has to forego most of the deductions/ exemptions including those under section 80C (maximum of ₹1.5 lakh) that can be claimed by investing in specified financial products, section 80D for health insurance premium paid; exemption for house rent allowance and leave travel allowance.
While the old tax regime allows deducting such amounts from the total income, the higher tax rates lead to higher tax liability.
Choosing between the old and new tax regime depends on the total amount of deductions and exemptions each individual is availing in the old tax regime.
We tried to simplify this by reaching a breakeven amount for each income level (see GFX) for a salaried person aged below 60, which can be used to choose between the two tax regimes.
To put it simply, if the aggregate amount of deductions and exemptions that you are eligible to claim under the old tax regime is more than the breakeven threshold that matches the income level, then you would be better off sticking to the old tax regime. Otherwise, it is beneficial to move to the new tax regime.
At the breakeven amount, there would be no difference in the tax liability between the two tax systems.
For example, if your gross total income is ₹12 lakh per annum and tax-breaks amount of ₹3.5 lakh (See GFX), your tax liability under both the regimes would be same, which is ₹82,500. However, if the total tax-break amount is lower than ₹3.5 lakh, your tax liability under the new tax regime would be lower than in the old tax regime.
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