What Has Changed Between the New and Old Tax Regimes?

“I had introduced, in the year 2020, the new personal income tax regime with six income slabs starting from ₹ 2.5 lakh. I propose to change the tax structure in this regime by reducing the number of slabs to five and increasing the tax exemption limit to ₹ 3 lakh,” Ms Sitharaman said.

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Individual taxpayers were given the option in Budget 2020 to either continue in the previous rate, which allowed them to claim tax exemptions, or choose for the lower new rate, which did not allow them to claim exemptions.

The prior tax scheme had a 30% tax rate for persons with an annual income of 15 lakh, but they could seek exemptions.

Those who chose the new regime, which was initially announced in 2020, and had an income of more over 15 lakh were taxed at 25%, although they could not claim exemptions.

Below is an example of how the new tax regime leads to more savings:

If your annual salary is less than Rs. 7 lakh, you are exempt from paying tax. Previously, the rebate was 5 lakh.

Assume your annual pay is Rs. 9 lakh. It will be taxed by dividing the total into slabs. Accordingly:

A. 0-Rs 3 lakh: no tax (earlier, it was 0-Rs 2.5 lakh)

Balance: ₹ 6 lakh to be taxed under two slabs i.e. ₹ 3-6 lakh portion at 5 per cent and ₹ 6-9 lakh portion at 10 per cent

B. ₹ 3 lakh taxed at 5 per cent: ₹ 15,000

Balance: ₹ 3 lakh to be taxed under one slab i.e. ₹ 6-9 lakh portion at 10 per cent

C. ₹ 3 lakh taxed at 10 per cent: ₹ 30,000

Total tax on ₹ 9 lakh (sum of A, B and C): ₹ 45,000

However, if tax on this ₹ 9 lakh was calculated using the old slabs (0-Rs 2.5 lakh exempted and ₹ 5 lakh rebate), you’d need to pay at least ₹ 60,000, which means the new slabs lead to savings of some 25 per cent.