Old vs New Tax Regime: Salary above Rs 8 lakh and beyond? This regime will do wonders for you

Old vs New Tax Regime, ITR Filing: For many taxpayers, selection between the old and the new tax regime when filing the income tax return (ITR Filing) can be as tough as selecting identical right and wrong paths in the dark. It can be nearly impossible for a taxpayer with limited knowledge of taxation rules to pick the right regime that can reduce their tax burden to the minimum. The basic problem between selecting the old and the new tax regime is that taxpayers don't know which of them will help them save more tax?

In the 2023 Budget, the finance ministry made the new tax regime a default option for new taxpayers.

However, they can still choose the old tax regime.

In the new tax regime, after a standard deduction of Rs 75,000 and rebate, the income up to Rs 7 lakh is tax-free.

As far as the old regime is concerned, taxpayers with investments listed in Section 80C of the Income Tax Act, 1961, and other deductions such as house rent allowance (HRA) prefer the old tax regime.

General perception is that if you have investments and deductions and are in a salary bracket of over Rs 7 lakh, the old tax regime is a better choice than the new tax regime.

But without calculating tax in both regimes, it is not a healthy practice to build a perception on hearsays.

In a study based on income tax calculation, courtesy BankBazaar.com, we show how much deductions you need in the old tax regime to match the tax amount in the new tax regime.

It has calculated tax in the old and new tax regimes on an annual income of over Rs 7 lakh.

It tells how much deductions you need in the old tax regime, excluding the standard deduction of Rs 50,000, to pay the same tax as one will pay in the new tax regime after the standard deduction of Rs 75,000 and without availing any other deduction. 

Tax Calculator Courtesy: Bankbazaar.com

As you can see in the table, in the Rs 8 lakh salary bracket, you need deductions of Rs 2 lakh to pay the same tax (Rs 23,400) as in the new tax regime.

For an income of Rs 9 lakh, the deduction should be Rs 2.50 lakh; while in the Rs 10 lakh bracket, it should be Rs 3 lakh.

It keeps changing till the Rs 15 lakh salary bracket, where you need Rs 4.08 lakh deductions.

Once you cross the Rs 15 lakh limit, you need to have deductions of at least Rs 4.33 lakh to match the tax level of the new tax regime.

What does the study suggest? Which tax regime should you pick?

The study suggests that if you have deductions up to the limit shown in the table above, you can pick either of the tax regimes.

But if your deductions are falling short of these limits, the new tax regime is a better choice. 

AR Hemant, AVP, Bankbazaar.com, says, "The ‘magic’ deduction, where taxes under both regimes become equal is seen to be around 30% up till the Rs 15 lakh income mark. Between Rs 16 and Rs 50 lakh, the ‘magic’ number is Rs 483,333. This includes the standard deduction of Rs 50,000 under the old regime. For example, home loan deductions can be Rs 1.5 lakh under 80C for principal payment and Rs 2 lakh under 24B for interest. You can add 80D deductions up to Rs 1 lakh for health insurance premia and preventive health checkups. There’s also NPS deductions under 80CCD, HRA for rent paid, interest deduction for loan on let-out property, and donations to 80G-eligible charities. Adding all these deductions, if you’re able to cobble up a total deduction exceeding Rs 4.83 lakh, you’re better off in the old regime."