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Should you choose the new tax regime from 1st April 2023?

Posted on 01 Apr 2023
Author: Sayan Sircar

Tags: Tax ; Calculator

6 mins read
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This article describes how to use the Arthgyaan goal-based investing tool as a calculator to determine if switching to the New Tax Regime makes sense.

Should you choose the new tax regime from 1st April 2023?

📚 Topics covered:

What is the new tax regime?
Switching regimes and default options
Switching from new to old or back
- Tax payers without income from business or profession
- Tax payers with income from business or profession
Using the calculator
Case 1: Income 20 lakhs, usual deductions
Case 2: Income 20 lakhs, usual deductions but no HRA
Case 3: Income 30 lakhs, usual deductions, home loan
Case 4: Income 30 lakhs, usual deductions, HRA
Case 5: Income 30 lakhs, usual deductions, no HRA, no home loan
Summing up

What is the new tax regime?

Budget 2020 introduced the New Tax Regime (NTR) with the premise of lower overall taxes on income as long as tax deductions like 80C, 80D, HRA etc., are foregone by the investor. In contrast, the Old Tax Regime (OTR) allows all of these deductions but with a higher tax on the post-deduction income. As per Budget 2023,

Old tax Regime slabs for post-deduction income are:

0-2.5L - 0%
2.5-5L - 5%
5-10L - 20%
10L+ - 30%

New tax Regime slabs for post-deduction income are:

0-3L - 0%
3-6L - 5%
6-9L - 10%
9-12L - 15%
12-15L - 20%
15L+ - 30%

Given how these slabs are structured, there is a break-even point based on the total amount of deductions you usually take so that one of the tax regimes leads to lower taxes. Now that NTR is the default option, it is essential to correctly choose the tax regime, as many companies will open up the choice in April.

Switching regimes and default options

An individual salaried taxpayer can switch between the old and new tax regimes once a year without restrictions. If you have yet to specify the regime to your employer, then the new tax regime will be used by default. You must also file your ITR on time if you wish to use the old tax regime.

Taxpayers can also declare one tax regime (old or new) to their employer and then switch to the other one when filing.

This article helps you decide, based on your tax planning and the deductions you wish to take, which regime will be beneficial for you this financial year, i.e. FY2023-24, which starts on 1st April 2023. However, you should remember that if you declare the wrong tax regime and later add/remove deductions, more tax will get deducted. Therefore, you will have to ask for a refund when filing.

There are other financial tasks due in April. Here is a list: How should you plan your investments and taxes in April?.

Did you know that we have a private Facebook group which you can join for free and ask your own questions? Please click the button below to join.

Switching from new to old or back

Tax payers without income from business or profession

As per Budget 2023, new tax regime is the default unless the tax-payer chooses the old regime.

You can switch between old and new and back anytime during tax-filing by 31st July. If you miss the 31st July deadline, you cannot switch regimes and have to choose the new regime.

Tax payers with income from business or profession

These tax filers who must use ITR 4, have to fill Form 10-IEA to choose the old tax regime before 31st July. Otherwise, the new regimes will apply.

If you have income from business or profession, you cannot switch regimes every year.

Using the calculator

We use the Arthgyaan Goal-based investing calculator to formulate the investment model with all the above assumptions and goals. There is a link to download a pre-filled copy of the Google sheet via the button below.

Important: You must be logged into your Google Account on a laptop/desktop (and not on a phone) to access the sheet.

Once you get your sheet, you can get access to video tutorials in the howto tab.

We show a few cases below.

Case 1: Income 20 lakhs, usual deductions

Old vs new tax regime case 1

Case 2: Income 20 lakhs, usual deductions but no HRA

Old vs new tax regime case 2

Case 3: Income 30 lakhs, usual deductions, home loan

Old vs new tax regime case 3

Case 4: Income 30 lakhs, usual deductions, HRA

Old vs new tax regime case 4

Case 5: Income 30 lakhs, usual deductions, no HRA, no home loan

Old vs new tax regime case 5

All of these case studies are present as separate tabs in the Sheet.

Summing up

As in all the cases above, the differentiating factor is the quantum of deductions. As long as the amount of deductions from 80C, 80D, home loan, HRA etc., exceeds ₹3.75 lakhs (we will ignore the ₹50,000 standard deduction since that is the same for both regimes), the old tax regime is better.

The old tax regime, therefore, makes sense only if you have substantial valid investments via 80C, pay a good amount of medical insurance premium under 80D and have either a home loan or receive HRA.

The new tax regime makes sense

if you have a high enough income so that 80C is taken care of by default by EPF but do not have a home loan or no HRA since the could be very close or less to 10% of your basic pay
if you stay in your own home without a home loan and do not have to pay rent or EMI
if you have planned your investments as per goal-based investing and do not have an excess allocation to debt investments like PPF or insurance plans

If you are still determining your deductions, you can play around with your options in the calculator to see what works best for you.

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