Old Income Tax Scheme:

The old income tax scheme is also known as the existing tax regime. It is a tax structure that has been in existence for many years. Under this scheme, the tax rates are based on the income earned by an individual. The tax rates are as follows:

• Up to Rs. 2.5 lakh: Nil
• 5 lakh to Rs. 5 lakh: 5%
• 5 lakh to Rs. 10 lakh: 20%
• Above Rs. 10 lakh: 30%

This scheme allows for deductions under various sections of the Income Tax Act, such as Section 80C, 80D, and 80G, among others. Taxpayers can claim deductions for investments made in these sections, such as provident fund, life insurance premiums, and donations made to charitable organizations.

New Income Tax Scheme:

The new income tax scheme was introduced in the Union Budget of 2020. It is an optional tax scheme that offers lower tax rates but fewer deductions. The tax rates under the new income tax scheme are as follows:

• Up to Rs. 3 lakh: Nil
• 3 lakh to Rs. 6 lakh: 5%
• 6 lakh to Rs. 9 lakh: 10%
• 9 lakh to Rs. 12 lakh: 15%
• 12 lakh to Rs. 15 lakh: 20%
• Above Rs. 15 lakh: 30%

Comparison between Old and New Income Tax Scheme:

The new income tax scheme offers lower tax rates but fewer deductions. Taxpayers can choose between the old and new income tax schemes depending on their preference. Here are some key differences between the two schemes:
Tax Rates: The new income tax scheme offers lower tax rates than the old income tax scheme. However, taxpayers must forego various deductions available under the old scheme.
Deductions: The old income tax scheme offers various deductions under different sections of the Income Tax Act. In contrast, the new income tax scheme offers fewer deductions.
Eligibility: The new income tax scheme is an optional scheme, whereas the old income tax scheme is the existing tax regime. Taxpayers can choose between the two schemes depending on their preference.

For Better Understanding with example:

There are two income tax schemes, the old income tax scheme, and the new income tax scheme. we will compare the tax liability under the old and new income tax schemes for an individual earning up to Rs. 15 lakh.

Old Income Tax Scheme:

Under the old income tax scheme, the tax liability for an individual earning up to Rs. 15 lakh is as follows:

• Up to Rs. 2.5 lakh: Nil
• 5 lakh to Rs. 5 lakh: 5%
• 5 lakh to Rs. 10 lakh: 20%
• Above Rs. 10 lakh to Rs. 15 lakh: 30%

Let’s assume that an individual has a taxable income of Rs. 15 lakh under the old income tax scheme. The tax liability for this individual would be calculated as follows:

• Up to Rs. 2.5 lakh: Nil
• 5 lakh to Rs. 5 lakh: 5% on Rs. 2.5 lakh = Rs. 12,500
• 5 lakh to Rs. 10 lakh: 20% on Rs. 5 lakh = Rs. 1,00,000
• Above Rs. 10 lakh to Rs. 15 lakh: 30% on Rs. 5 lakh = Rs. 1,50,000

Total Tax Liability: Rs. 2,62,500

New Income Tax Scheme:

Under the new income tax scheme, the tax liability for an individual earning up to Rs. 15 lakh is as follows:

• Up to Rs. 3 lakh: Nil
• 3 lakh to Rs. 6 lakh: 5%
• 6 lakh to Rs. 9 lakh: 10%
• 9 lakh to Rs. 12 lakh: 15%
• 12 lakh to Rs. 15 lakh: 20%
• Above Rs. 15 lakh: 30%

Let’s assume that the same individual as above has a taxable income of Rs. 15 lakh under the new income tax scheme. The tax liability for this individual would be calculated as follows:

• Up to Rs. 3 lakh: Nil
• 3 lakh to Rs. 6 lakh: 5% on Rs. 3 lakh = Rs. 15,000
• 6 lakh to Rs. 9 lakh: 10% on Rs. 3 lakh = Rs. 30,000
• 9 lakh to Rs. 12 lakh: 15% on Rs. 3 lakh = Rs. 45,000
• 12 lakh to Rs. 15 lakh: 20% on Rs. 3 lakh = Rs. 60,000

Total Tax Liability: Rs. 1,50,000

Under the new income tax scheme, the individual cannot claim deductions under various sections of the Income Tax Act. However, they can claim deductions for investments made in the National Pension System (NPS) and health insurance premiums under Section 80D.

Common deductions in both new and old tax regime :-

• The standard deduction of ₹50,000, which was only available under the old regime, has now been extended to the new tax regime as well.

• Under the both new and old tax regime, taxpayers can claim the benefit of employer contributions to their National Pension System (NPS) account under section 80CCD(2) of the Income Tax Act.

 Taxpayers can claim a deduction for interest paid on housing loans taken for a rented-out property under section 24(b) in both new and old tax regime.